Explanatory notes on the provisions of the Direct Tax Laws (Amendment) Act, 1987 [as amended by the Direct Tax Laws (Amendment) Act, 1989]--Part-III - Income Tax - 551/1990

Explanatory notes on the provisions of the Direct Tax Laws (Amendment) Act, 1987 [as amended by the Direct Tax Laws (Amendment) Act, 1989]--Part-III Circular No. 551 Dated 23/1/1990 INTRODUCTION 1.1 Explanatory notes in respect of provisions of the Amending Act, 1987, which have come into force with effect from 1st April, 1988, were issued in Part I, vide Circular No. 545, dated 21st September, 1989. Further explanatory notes in respect of some of the provisions of the Amending Act, 1987, which have come into effect from 1st April, 1989 (including one provision which will come into effect from 1st April, 1992), were issued in Part II, vide Circular No. 549, dated 31st October, 1989. 1.2 Scope of this circular (Part III of the explanatory notes).--This circular explains the rest of the provisions of the Amending Act, 1987, which have come into effect from 1st April, 1989 (i. e., excluding those explained in Part II to those explanatory notes). The provisions of section 6(f) of the Amending Act, 1987, which have come into effect from 1st April, 1986, are also explained in this circular. 1.3 This circular also explains those provisions of the Amending Act, 1989, which have further amended the provisions of the Amending Act, 1987, which are discussed in this circular. Withdrawal, of certain new provisions introduced by the Amending Act, 1987 2.1 As mentioned in para. 3.1 of Part I of these explanatory notes, the provisions dealing with following matters, introduced by the Amending Act, 1987, have been withdrawn by the Amending Act, 1989 :-- (i) Scheme of taxation of firms and partners. (ii) Scheme of tax treatment in respect of charitable and religious institutions, trusts, etc., as also scientific and sports associations and institutions of national importance. (iii) Charging of additional tax in lieu of penalty for concealment of income/wealth/gift. 2.2 Since the aforesaid new provisions have been withdrawn, the same are not discussed in detail in these explanatory notes. However, the provisions of the Income-tax, Wealth-tax and Gift-tax Acts, which were first amended, omitted or newly inserted by the Amending Act, 1987, to introduce these provisions, and then restored to their original form by the Amending Act, 1989, are indicated in the following paras. 2.3 Scheme of taxation of firms and partners.--A large number of sections of the Income-tax Act were amended, omitted or newly inserted by the Amending Act, 1987, to introduce a scheme of taxation of firms and partners. The Table below shows the sections of the Amending Act, 1987, which introduced the said scheme, the sections of the Income-tax Act which were affected and the subject-matter of amendments in brief. The Table also indicates the sections of the Amending Act, 1989, which have withdrawn the said scheme and have restored the old provisions in this respect. Sl. No. Sections of the Amending Act, 1987, which introduced the scheme Sections of the Income-tax Act which were affected Subject matter of amendments in brief Sections of the Amending Act, 1989, which have omitted the sections of the Amending Act, 1987, mentioned in column 2 to withdraw the scheme 1 2 3 4 5 1 3(p) and 3(s) 2(39) and 2(48) omitted. Definitions of "registered firm" and "unregistered firm" omitted. 95(a)(1) 2. 6(a) New clause (2A) inserted in section10. Share of a partner in the income of the firm exempted. 95(b) 3. 8 15 (Amended) Remuneration, etc., received by a partner from the firm not to be regarded as salary. 95(c) 4. 9(a) 28 (Amended) Interest and remuneration etc., received by a partner from the firm to be taxed under the head "Profits and gains of business or profession". 95(d) *5. 13(ii) New clause (b) substituted in section 40. Interest and remuneration etc., paid by firm to its partners to be allowed as deduction within permissible limits laid down in the new clause. 95(f) *6. 17 64(1)(Amended) Provisions for clubbing the share income of the spouse or the minor child from a firm with the income of the other spouse or the parent omitted. 95(g) *7. 18 New section 67 substituted Provisions for computing a partner's share income in the firm omitted. 95(g) 8. 19 75 to 77 (omitted) Provisions for carry forward of loss of registered and unregistered firms omitted. 95(g) 9. 20 New sub-section (1) substituted in section 78 Consequential amendments made in the provision regarding carry forward and set off of losses in case of change in the constitution of a firm. 95 (g) *10. 21 New sub-section (3) section 80A. Consequential amendment substituted in made to exclude references to firms and partners. 95(g) *11. 29 New section 86 substituted Provisions for rebate on the share income of a partner in an unregistered firm, which is included in his total income omitted. 95(g) 12. 61(a) 155(1)(Amended) Provisions regarding rectification of a partner's share in the income of the firm made applicable up to assessment year 1988-89 only. 95(i)(1) 13. 62 158(Amended) Provisions regarding intimation of the assessment of the firm and apportionment of its income among partners made applicable up to assessment year 1988-89 only. 95(j) *14. 66 New section 167A Tax is levied at the maximum substituted marginal rate in the case of a firm (after allowing deduction for interest and remuneration, etc., paid to partners, as indicated at Sl. No. 5 above). 95(j) 15. 67 182 and 183 (omitted) Separate provisions regarding assessment of registered and unregistered firms omitted. 95(j) 16. 68 Two new sections 184 and 185 substituted for the existing sections 184 to 186. Provisions regarding registration and cancellation of registration of firms substituted by new provisions specifying the circumstances under which a firm will be taxed as a firm or as an association of persons. 95(j) 17. 69 187(1)(Amended) Provisions regarding apportionment of firm's income among partners pursuant to change in its constitution omitted. 95(j) 18. 71 189(3) (Amended)s Consequential amendments made in the provision regarding liability of partner of a dissolved firm. 95(j) 19. 72 New section 189A inserted The old provisions of Chapter XVI (sections 182 to 189) regarding assessment of firm and its partners made applicable up to assessment year 1988-89 only. 95(j) 20. 99 246(1)(g) and (h) (Amended) Appeal provisions against orders refusing to grant registration or cancelling registration made applicable up to assessment year 1988-89 only. 43(a)(i) 21. 100 247 (Omitted) Provisions regarding appeal by a partner in respect of determination of his share in the income/loss of the firm omitted. 95(j) 22. 101 New section 267 substituted. Consequential amendments made to exclude references to firm and partners in the new section. 95(j) 23. 126(5) 32(2) (Amended) Consequential amendments made in the provisions relating to carry forward of unabsorbed depreciation to exclude references to a registered firm and its partners. 95(o) NOTE : * (1) The sections of the Amending Act, 1987, indicated at serial Nos. 5, 6, 7, 10, 11 and 14 are of composite nature and relate not only to the provisions regarding the scheme of taxation of firms and partners, but also to the provisions regarding taxation of association of persons and body of individuals or some other provisions. Consequent to the omission of the aforesaid sections by the Amending Act, 1989, necessary amendment in the provision relating to the taxation of association of persons and body of individuals or in some other provisions have been incorporated again by the Amending Act, 1989, in the concerned sections 40, 64, 67, 80A(3), 86 and 167B of the Income-tax Act. These are discussed at the appropriate places in this part of the explanatory notes. **(2) Section 43(a)(i) of the Amending Act, 1989, has amended clauses (g) and (h) of sub-section (1) of the new section 246 of the Income-tax Act, as substituted by section 99 of the Amending Act, 1987, to remove the stipulation that the provisions of these clauses would apply up to assessment year 1988-89 only. 2.4 Scheme of tax treatment in respect of charitable and religious institutions, trusts, etc., as also scientific research and sports associations and institutions of national importance.--A number of sections of the Income-tax Act were amended, omitted or newly inserted by the Amending Act, 1987, to introduce a scheme of tax treatment of charitable and religious institutions, trusts, etc., as also scientific research and sports associations and institutions of national importance. The Table below shows sections of the Amending Act, 1987, which introduced the said scheme, sections of the Income-tax Act which were affected and the subject-matter of amendments in brief. The Table also indicates the sections of the Amending Act, 1989, which have withdrawn the said scheme and have restored the old provisions in this respect. Sl. No. Sections of the Amending Act, 1987, which introduced the scheme Sections of the Income-tax Act which were affected Subject matter of amendments in brief Sections of the Amending Act, 1989 which have omitted/amended the sections of the Amending Act, 1987, mentioned in column 2 to withdraw the scheme 1 2 3 4 5 *1. 6 (k) 10(21) and 10(23) omitted. Provisions regarding exemption of income of scientific research and sports associations omitted. 95(b) *2. 6(1) 10(23C)(iv) and 10(23C)(v) (omitted) Provisions regarding exemption of income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution omitted. **3. 7 11, 12, 12A and 13 (omitted) Provisions regarding exemption of income of charitable and religious trusts and institutions omitted. 95(c) $4. 10 35, 35CCA and 35CCB (omitted) Provisions regarding allowance of expenditure on scientific research or expenditure by way of payments to institutions carrying out rural development programmes or programmes for conservation of natural resources omitted. 95(e) 5. 16 New section 54A inserted. Relief provided in respect of tax on capital gains on transfer of property held under trust for charitable or religious purposes or by certain institutions. 95(g) 6 24 New section 80F inserted. A unified scheme introduced for tax treatment of charitable and religious trusts and institutions and also institutions of national importance including those involved in scientific research, sports, rural development and conservation of natural resources. This is in replacement of the provisions of the old sections 10(21), (23), (23C)(iv) and (v), 11, 12, 12A and 13. 95(9) 7. 25 (a), (b), (d) and (e) 80G (1), (2), (5) and Explanation 2 (Amended) Provisions made for 100% deduction in respect of sums donated to institutions of national importance involved in scientific research, rural development and conservation of natural resources, and for 50% deduction in respect of sums donated to other trusts or institutions covered under section 80F. This is in replacement of the provisions of sections 35, 35CCA, 35CCB and 80GGA. 95(h) 8. 26 80GGA (omitted) Provisions regarding deductions in respect of certain donations for scientific or rural development omitted. 95(g) 9. 122 New section 296 substituted. Consequential amendments made in section 296 relating to placing of rules, etc. before Parliament, pursuant to the omission of section 10(23C)(iv). 95(j) 10. 126(8) and (13) 43A (1) and 80G(5) (Amended) Consequential amendments made pursuant to the omission of sections 10(23) and 35. 95(o) NOTES : *(1) While restoring back clauses (21), (23), (23C)(iv) and (v) of section 10 of the Income-tax Act, the Amending Act, 1989, has further amended the said clauses of section 10 to introduce certain conditions for safeguarding against the misuse of the exemptions provided under these clauses. These are discussed at the appropriate places in this part of the explanatory notes. **(2) While restoring back sections 11, 12, 12A and 13 of the Income-tax Act, the Amending Act, 1989, has further made certain modifications in the provisions of section 11. These are discussed at the appropriate places in this part of the explanatory notes. +(3) Section 10 of the Amending Act, 1987, omitted not only sections 35, 35CCA and 35CCB, but also sections 35B, 35C and 35CC of the Income-tax Act. The Amending Act, 1989, has amended the said section 10 of the Amending Act, 1987, to secure that only sections 35B, 35C and 35CC of the Income-tax Act are omitted, while sections 35, 35CCA and 35CCB thereof are restored back. The Amending Act, 1989, has further amended section 35 to introduce certain conditions for safeguarding against possible misuse of its provisions. These are discussed at the appropriate places in this part of the explanatory notes. 2.5 Some sections of the Amending Act, 1987, which had made consequential amendments in certain sections of the Wealth-tax and the Gift-tax Acts, have also been omitted by the Amending Act, 1989. These are indicated in the following Table : --- Sections of the Amending Act, 1987, which made consequential changes in the Wealth-tax/Gift tax Sections of the Wealth-tax/Gift-tax Acts, which were affected Sections of the Amending Act, 1989, which have omitted Acts the sections of the Amending Act, 1987, mentioned in column 1 2 3 144 21 A of the Wealth -tax Act 95(p) 160(1) 5(1)(i) of the Wealth-tax Act 95(r) 184(c) and (d) 45 of the Gift-tax Act 95(1) 2.6 Charging of additional tax in lieu of penalty for concealment of income/wealth/gift.---Some sections of the Income-tax, Wealth-tax and Gift-tax Acts were amended or newly inserted by the Amending Act, 1987, to charge additional tax in lieu of penalty form concealment of income/wealth/gift. The Table below shows the sections of the Amending Act, 1987, which carried out the necessary changes, the sections of the Income-tax, Wealth-tax and Gift-tax Acts which were affected and the subject-matter of amendments in brief. The Table also indicates the sections of the Amending Act, 1987, which have withdrawn the charge of additional tax in the three Acts and have restored the old penalty provisions. Sl. No. Sections of the Amending Act, 1987, which introduced, the charge of additional tax in lieu of penalty for concealment of income/ wealth/gift Sections of the Income-tax, Wealth-tax, Gift- tax Acts which were affected Subject-matter of the amendments in brief Sections of the Amending Act, 1989, which have omitted the sections of the Amending Act, 1987, mentioned in column 2 to restore the old position. 1 2 3 4 5 1. 63 New section 158B inserted in the Income-tax Act. Additional income-tax to be levied, where income assessed on regular assessment exceeds the returned income, @ 30% of such excess amount. 95(j) *2. 99 New section 246A inserted in the Income-tax Act. Application can be moved by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) after submission of return for deciding any issue even when the assessment is not completed. 44 **3. 106 New section 271 substituted in the Income-tax Act. Provisions for the levy of penalty for concealment of income omitted. 95(m) 4. 126(23) 253(1)(a) of the Income-tax Act. Consequential amendments made in the (Amended) provisions relating to appeals to the Appellate Tribunal, pursuant to the insertion of new section 246A. 95(o) **5. 142 New section 18 substituted in the Wealth-tax Act. Provisions for levy of penalty for concealment of wealth omitted. 95(p) 6. 143 New section 18D inserted in the Wealth-tax Act. Additional wealth-tax to be levied, where the net wealth determined on regular assessment exceeds the net wealth returned, @ 3 % of such excess amount. 95(p) 7. 147 New section 23A inserted in the Wealth-tax Act. Application can be moved by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for a decision as in 2 above. 95(p) 8. 160(2) 24 (1) of the Wealth-tax Act (Amended) Consequential amendments made in the provisions relating to appeals to the Appellate Tribunal, pursuant to insertion of new section 23A. 95(r) **9. 174 New section 17 substituted in the Gift-tax Act. Provisions for levy of penalty for concealment of gifts omitted. 95(p) 10. 175 New section 18B inserted in the Gift-tax Act. Additional gift-tax to be levied, where value of taxable gifts determined on regular assessment exceeds the value of taxable gifts returned, @ 20% of such excess amount. 95(p) 11. 177 New section 22A inserted in the Gift-tax Act. Application can be moved by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for a decision as in 2 and 7 above. 95(p) 12. 186(2) 23(1) of the Gift- tax Act (Amended) Consequential amendments made in the provisions relating to appeals to the Appellate Tribunal, pursuant to the insertion of new section 22A. 95(u) NOTES : *(1) Section 99 of the Amending Act, 1987, had substituted the earlier section 246 of the Income-tax Act, relating to appealable orders by two new sections 246 and 246A. Section 44 of the Amending Act, 1989, has omitted only the new section 246A relating to application by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for advance decisions in certain cases. The new section 246 relating to appealable orders has been retained with some amendments made by section 43 of the Amending Act, 1989. These are discussed at the appropriate places in this Part of the Explanatory Notes. **(2) Sections of the Amending Act, 1987, indicated at Serial Nos. 3, 5 and 9 are of composite nature and relate, not only to the provisions regarding charging of additional tax in lieu of penalty for concealment of income/wealth/gift, but also to provisions regarding other penalties under the Income-tax, Wealth-tax and Gift-tax Acts. Consequent to the omission of these sections by the Amending Act, 1989, necessary amendments relating to other penalties have been incorporated again by the Amending Act, 1989, in the concerned section 271 of the Income-tax Act, sections 18 and 18A of the Wealth-tax Act and sections 17 and 17A of the Gift-tax Act. These are discussed at the appropriate places in this Part of the Explanatory Notes. Amendments to the Income-tax Act, 1961 INCOMES WHICH DO NOT FORM PART OF TOTAL INCOME (SECTION 10) 3.1 Section 10 of the Income-tax Act deals with incomes which do not form part of total income, i.e., incomes which are totally exempt from income-tax. This section contains a large number of clauses, which provide various types of exemptions to achieve different social and economic objectives. The Amending Act, 1987, has amended, omitted or newly inserted a number of clauses of this section. The Amending Act, 1989, has made further changes in some of the amendments made by the Amending Act, 1987. These are discussed in the following paras. 3.2 Exemption of share of a partner in the income of a firm [insertion of new clause (2A)].--This was withdrawn by the Amending Act, 1989 (refer to item 2 of the Table given in para 2.3 ante.) 3.3. Merger of clauses (4) and (4A) and also rationalisation of the provisions of these clauses.--Under the old provisions of clause (4), the following income was exempt in the case of a non-resident (whether an individual or a company or a firm, etc.) :-- (i) any income from interest on such securities as the Central Government might, by notification in the Official Gazette, specify in this behalf, and (ii) any income from interest on or from premium on redemption of certain types of bonds which were specified in the clause. 3.4 Under the old provisions of clause (4A), exemption from tax was provided to a person resident outside India in respect of his income from interest on money standing to his credit in a Non-Resident (External Account) in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973, and any rules made thereunder. An Explanation to this clause clarified that "person resident outside India" shall have the same meaning as in clause (q) of section 2 of the Foreign Exchange Regulation Act, 1973. From the definition given in section 2(q) of the Foreign Exchange Regulation Act, 1973, it follows that the provisions of this clause applied only to individuals residing outside India and not to any other entity like a company, firm, etc. 3.5 Since both the said clauses (4) and (4A) serve the same purpose of encouraging investments in India by non-residents by exempting income earned by them from certain securities, bonds or bank accounts, the Amending Act, 1987, has merged these two clauses into a single clause (4) with two sub-clauses (i) and (ii) providing for the same exemptions in a rationalised manner. The changes made are indicated below :-- (i) Sub-clause (i) of the new clause (4), which corresponds to the old clause (4), provides that bonds, income from which by way of interest or premium on redemption is intended to be exempt, will also be notified in the official gazette in the same manner as securities. Consequently, the specific mention of the type of bonds, which occurred in the old clause (4), does not find place in sub-clause (i) of the new clause (4). (ii) Sub-clause (ii) of new clause (4), which corresponds to the old clause (4A), incorporates the provisions of the Explanation to the old clause (4A) in the main provision itself. It also clearly mentions that its provisions are applicable to an individual who is a "person resident outside India", as defined in section 2(q) of the Foreign Exchange Regulation Act, 1973. 3.6 Amendment of provisions relating to exemption of travel concession and assistance received from employers [clause (5)].--Under the old provisions of clause (5), the value of any travel concession or assistance received by an employee, who was a citizen of India, from his employer was exempt if it was in connection with his proceeding on leave with his family to any place in India, or if it was in connection with their proceeding to any place in India after retirement from service or after termination of service of the employee. The clause consisted of two sub-clauses as follows :-- (i) Sub-clause (i) applied to the assessment year 1970-71 and earlier assessment years. (ii) Sub-clause (ii) applied to the assessment year 1971-72 and subsequent assessment years. The exemption was subject to the safeguards provided in the proviso to sub-clause (ii) of the said clause (5). It was also subject to the conditions prescribed in rule 2B of the Income-tax Rules, 1962. 3.7 The Amending Act, 1987, has substituted a new clause (5) in the section with a view to rationalise its provisions and also to make it more broadbased. The salient features of the new clause are :-- (i) The exemption is now available to all employees, irrespective of the fact whether they are citizens of India or not. (ii) The obsolete portion of the old clause, which related to the assessment year 1970-71 and earlier assessment years, has been omitted. (iii) The exemption under the clause shall now be available only if the amount of travel concession or assistance has been actually incurred by the concerned employee for the purposes of the travel. (iv) It has been specifically mentioned in the clause itself that the conditions to be prescribed for availing of the exemption may include conditions as to the number of journeys and the amount which shall be exempt per head. 3.8 It may be mentioned that the Income-tax (First Amendment) Rules, 1989, issued under Notification No. S. O. 239 (E), dated 29-3-1989 (See [1989] 176 ITR (St.) 325), has substituted a new rule 2B in the Income-tax Rules, 1962, which prescribes conditions that are in conformity with the provisions of the new clause (5) of section 10 of the Income-tax Act. 3.9 Amendment of provisions relating to exemption of gratuities received by employees on retirement, termination of service, death, etc. [Clause (10)].--Clause (10), which exempts from tax the gratuity received by an employee or his legal heirs on his retirement, termination of employment, death etc., covers three classes of employees as follows :-- (i) Sub-clause (i) deals with employees of the Central Government State Governments and local authorities, who receive death-cum-retirement gratuity. (ii) Sub-clause (ii) deals with employees who receive gratuity under the Payment of Gratuity Act, 1972. (iii) Sub-clause (iii) deals with employees of private employers, i.e., those employees who are not covered under sub-clauses (i) and (ii) above. 3.10 Under the old provisions of sub-clause (iii) of clause (10), any gratuity received by an employee of a private employer on his retirement or on termination of his employment or on his becoming incapacitated before retirement or any gratuity received by his legal heirs on his death was exempt from tax to the extent it did not exceed one-half month's salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity was paid. The gratuity was further subject to the maximum limit of Rs. 36,000 or 20 months' salary so calculated, whichever was less. 3.11 With a view to rationalise the provisions of the said sub-clause (iii), the Amending Act, 1987, has made the following amendments therein :-- (i) Calculation of the amount of gratuity to be exempted is now to be made on the basis of the average salary for 10 months immediately preceding the month of retirement, etc., instead of the average of three years, as was the case under the old provisions. (ii) The maximum limits of exemption, namely, Rs. 36,000 or 20 months' salary are not specified in the sub-clause. Instead, it is now provided that the limit may be specified by the Central Government by way of notification in the official gazette, having regard to the limit applicable to the Central Government employees. As a result of this amendment, it would not be necessary to make frequent changes in the Income-tax Act every time the monetary limit is to be changed as and when the maximum amount of allowable gratuity is changed in the case of Central Government employees. 3.12 There were four provisos in the old clause (10), which provided as under :-- (i) The first proviso stipulated that where gratuities were received from two or more employers in the same year, the maximum amount of gratuity to be exempt would be Rs. 36,000. (ii) The second proviso stipulated that where gratuity or gratuities were received in any earlier year or years also, the limit of Rs. 36,000 would be reduced by the amount of gratuity or gratuities which had been exempted in the earlier year or years. (iii) The third proviso empowered the Central Government to further raise the monetary ceiling of Rs. 36,000 by notification in the official gazette, keeping in view the maximum amount of gratuity which may be exempt in the case of Government servants. (iv) The fourth proviso stipulated that where the retirement, incapacitation, termination of employment or death of the employee had taken place before 31st January, 1982, the maximum amount of gratuity to be exempted would be Rs. 30,000. 3.13 In view of the fact that the monetary limit of Rs. 36,000, which was earlier mentioned in sub-clause (iii), has been omitted therefrom and is now to be specified by the Central Government in a Notification to be issued in the Official Gazette from time to time, the Amending Act, 1987, has made consequential amendments in the first and the second provisos. The Amending Act, 1987, has further omitted the third and fourth provisos, as these provisions are no longer necessary. 3.14 The Amending Act, 1987, has also amended the Explanation to clause (10) which defines the term "salary" for the purposes of the clause, to provide that the definition will also be valid for the purposes of clause (10AA). 3.15 Amendment of provisions relating to exemption of amount received by an employee by way of commutation of pension [clause (10A)].--Commutation of pension received from private employers is exempt to the extent mentioned in sub-clause (ii) of clause (10A). A proviso to the clause provided that the limits of payment mentioned in sub-clause (ii) shall not apply in respect of any such payment made before 19th August, 1965. The Amending Act, 1987, has omitted this proviso, as its provisions had become redundant. 3.16 Amendment of provisions relating to exemption of the amount received by an employee as cash equivalent of leave salary to his credit on his retirement [clause (10AA)].--Clause (10AA), which exempts from tax the cash equivalent of leave salary in respect of earned leave to the credit of an employee, received by him at the time of retirement covers two classes of employees as follows :-- (i) Sub-clause (i) deals with employees of the Central Government or a State Government. (ii) Sub-clause (ii) deals with employees other than employees of the Central Government or a State Government. 3.17 Under the old provisions of sub-clause (ii) of the said sub-clause (10AA), any payment received by an employee, other than an employee of the Central Government or a State Government, as cash equivalent of leave salary in respect of the period of earned leave to his credit at the time of his retirement was exempt from tax. Further, the maximum amount of exemption was limited to six months' leave salary, calculated on the basis of average salary drawn during the 10 months immediately preceding his retirement or Rs. 30,000, whichever was less. 3.18 This limit applicable to non-Government employees was required to be raised as a result of the higher amount getting exemption in the case of the Central Government employees as a result of the recommendations of the Fourth Pay Commission. To achieve this objective and also to rationalise the provisions, the Amending Act, 1987, has made the following amendments in the said sub-clause (ii) :-- (i) The maximum amount that would now be exempt is the equivalent of 8 months' leave salary instead of six months leave salary as was the case under the old provisions. (ii) The maximum limit of exemption, namely, Rs. 30,000, is not specified in the sub-clause. Instead, it is now provided that the limit may be specified by the Central Government by way of a Notification in the Official Gazette having regard to the limit applicable to the Central Government employees. This would avoid frequent changes in the Income-tax Act for the same reasons as explained in the case of amendment of clause (10) relating to gratuities (refer para 3.11 ante). 3.19 The old clause (10AA) also had four provisos similar to the four provisos in clause (10) relating to gratuities. The Amending Act, 1987, has made consequential changes in the first and second provisos and has omitted the third and fourth provisos of clause (10AA) for the same reasons as was done in the case of the four provisos of clause (10) (refer to paras 3.12 and 3.13 ante). The Amending Act, 1987, has also omitted clause (ii) of the Explanation to sub-clause (ii) of clause (10AA), which defined the term "salary" as the definition is now given in the Explanation at the end of clause (10) for purposes of both the clauses (10) and (10AA) (refer to para 3.14 ante). 3.20 Since the amendments to clause (10AA) were necessitated as a result of the recommendations of the Fourth Pay Commission in the case of the Central Government employees, which became effective from 1st July, 1986, the said amendments have also been made effective retrospectively from 1st July, 1986. 3.21 Amendment of provisions relating to exemption of compensation received by a workman under the "Industrial Disputes Act", 1947, etc. [Clause (10B)].--Under the old provisions of clause (10B), compensation received by a workman under the Industrial Disputes Act, 1947, or under any other Act or an award or contract of service or otherwise at the time of retrenchment was exempt subject to a maximum of the compensation allowable under the Industrial Disputes Act, 1947, or Rs. 50,000 whichever was less. This limit of Rs. 50,000 mentioned in the clause was Rs. 20,000 earlier, but was raised to Rs. 50,000 by the Finance Act, 1985. Thus, to enhance the limit every time, an amendment of the Act would have been necessary. 3.22 To avoid frequent amendments of the Act, the Amending Act, 1987, has amended clause (10B) to provide that the amount of compensation exempt under this clause shall not exceed-- (i) the amount calculated in accordance with the provisions of the Industrial Disputes Act, 1947, or (ii) such amount, not being less than Rs. 50,000, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less. Thus, under the amended clause, whenever the exemption limit of Rs. 50,000 is to be enhanced, it can be done by a notification. 3.23 Amendment of the provisions relating to exemption of allowances, etc., granted to the employees [clause (14) of section 101 and definition of "income" [clause (24) of section 2].--Under the old provisions of clause (14), any allowance or benefit, not being in the nature of entertainment allowance or other perquisite within the meaning of section 17(2), specially granted by an employer to an employee to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of his office or employment of profit, was exempt from tax to the extent such expenses were actually incurred for that purpose. An Explanation to this clause clarified that any allowance granted to an assessee to meet his personal expenses at the place of his posting or at the place where he ordinarily resided shall not be exempt under this clause. This was to secure that allowances like the city compensatory allowance should continue to be taxed, along with salary, in the hands of the employees. However, in spite of these provisions, the Madhya Pradesh High Court held in the case of Bishambar Dayal v. CIT [1976] 103 ITR 813, that the city compensatory allowance can neither be regarded as salary nor as perquisite and hence cannot be taxed under the head "Salaries". Following this decision, some of the appellate authorities also held that, apart from the city compensatory allowance, dearness allowance and additional dearness allowance were exempt from tax. The Calcutta High Court also held that the city compensatory allowance is not an item of income and, therefore, not taxable at all. [CIT v. R. R. Bajoria [1988] 169 ITR 162]. Since it was never the intention of the Government that allowances like the city compensatory allowance, dearness allowance, or the additional dearness allowance should be exempt from tax, necessary amendments have been made to clause (14) of section 10 by the Amending Act, 1987, and to the definition of "income" contained in clause (24) of section 2 by the Amending Act, 1989. These are discussed in the following paras. 3.24 The Amending Act, 1987, has substituted a new clause (14) for the old clause in section 10. The amendments made are as follows :-- (i) The new clause (14) consists of two sub-clauses (i) and (ii). The Explanation in the old clause (14) has been omitted, as its provisions have been incorporated in sub-clause (ii) of the new clause (14). (ii) Sub-clause (i) of the new clause contains the provisions of the old clause (14) relating to the exemption of special allowance or benefit granted to the employees to meet the expenses incurred in the performance of their duties. It further provides that only those allowances and benefits will be exempt which the Central Government may specify by notification in the Official Gazette. (iii) Sub-clause (ii) of the new clause provides that any allowance granted to an assessee, either to meet his personal expenses at the place of his posting or at the place where he ordinarily resides or to compensate him for the increased cost of living, will be exempt only if the Central Government specifies them by notification in the Official Gazette. 3.25 The Amending Act, 1989, has amended clause (24) of section 2. Allowances and benefits, which are mentioned in section 10(14), have been included in the definition of "income" by using the same language as is used in section 10(14). The amendment has been made retrospectively from 1st April, 1962. 3.26 The combined effect of the substitution of the new clause (14) in section 10 of the Income-tax Act by the Amending Act, 1987, and the amendment of the definition of "income" contained in section 2(24) of the Income-tax Act by the Amending Act, 1989, is that all allowances and benefits granted to the employees will first be treated as income in their hands, but those allowances and benefits which are intended to be exempt from tax will be specified in the notification to be issued under section 10(14). 3.27 It may be mentioned that the following notifications have so far been issued under the new clause (14) of section 10 to exempt various allowances and benefits :-- (i) Under sub-clause (i) of clause (14) : (1) Notification No. S.O. 143(E) dated 21-2-1989 (See [1989] 176 ITR (St.) 132) which exempts the travelling allowance and daily allowance while on tour or transfer. (2) Notification No. G.S.R. 606(E) dated 9-6-1989 (See [1989] 178 ITR (St.) 43) which exempts the conveyance allowance. (ii) Under sub-clause (ii) of clause (14) :-- Notification No. S.O. 144(E) dated 21-2-1989 (See [1989] 176 ITR (St.) 133) which exempts the following allowances to the extent mentioned therein :-- (1) Composite hill compensatory allowance. (2) Any special compensatory allowance in the nature of border area allowance, disturbed area allowance, etc. (3) Tribal area allowance. (4) Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty of running such transport. (5) Children educational allowance. (6) Any allowance granted to an employee to meet the hostel expenditure of his child. 3.28 If it is felt that any other allowance or benefit granted to the employee should be exempt from tax, it can be specified in a notification to be issued under section 10(14). Since allowances like the city compensatory allowance, dearness allowance and additional dearness allowance have not been notified under section 10(14), they would be taxable as income of the recipients under the amended provisions of section 2(24). 3.29 Amendment of provisions relating to exemption of interest, etc., on Government securities, bonds, annuity certificates, savings certificates and deposits [clause (15)].--Under the old provisions of sub-clauses (i), (ia), (ib), (ii) and (iia), the following were exempt from tax :-- (i) Monthly payment on 15-Year Annuity Certificates of the Central Government or other annuity certificates notified by the Central Government in this behalf [sub-clause (i)]. (ii) Annual payment on National Defence Gold Bonds, 1980 [sub-clause (ia)]. (iii) Premium on the redemption of Special Bearer Bonds, 1991 [sub-clause (ib)]. (iv) Interest on various savings certificates mentioned in the sub-clause and interest on deposits in post office savings bank account, etc. [sub-clause (ii)]. (v) Interest on fixed deposit under any scheme framed and notified by the Central Government in this behalf [sub-clause (iia)]. These sub-clauses were inserted and also amended from time to time, as and when the Government floated certain securities or bonds or savings certificates, etc., to exempt from tax, interest or any other income therefrom. 3.30 The Amending Act, 1987, has omitted all these sub-clauses and replaced them by a single clause (i), which provides exemption in respect of income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf. The exemption will be subject to such conditions and limits as may be specified in the said notification. As a result of this amendment, whenever the Central Government wants to exempt income from any new security, bond, certificate, deposit, etc., it need not amend the Act. The purpose will be served by the issue of a notification in this behalf. 3.31 Merger of clauses (17A), (17B) and (18) into a single new clause (17A) and also simplification and rationalisation of the provisions of these clauses.--Clauses (17A), (17B) and (18) provided for exemption in respect of the following :-- (i) Any payment, whether in cash or in kind, in pursuance of awards for literary, scientific or artistic work, or for alleviating the distress of the poor, the weak and ailing or for proficiency in sports and games, instituted by the Central Government or by any State Government or approved by the Central Government in this behalf [clause (17A)]. Proviso to this clause clarifies that the approval granted by the Central Government shall have effect for such assessment year or years as may be specified in the order of approval. (ii) Any payment, whether in cash or in kind, as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest [clause (17B)]. (iii) Any payment, whether in cash or in kind, by the Central Government or any State Government in pursuance of gallantry awards instituted or approved by the Central Government [clause (18)]. 3.32 The purposes of the three clauses were similar, i.e., to exempt from tax various awards and rewards given by the Central Government or State Governments or those approved by the Central Government in this behalf. The Amending Act, 1987, has, therefore, merged these clauses into a single new clause (17A). Also, there is no need to specify the purposes of these awards, because once these are given by the Central Government or a State Government or are approved by the Central Government, it can safely be presumed that such an award or reward would be for a genuine cause and would be in the national or public interest. Therefore, the purposes of the awards or rewards are not mentioned in the new clause (17A), which provides that the following payments made, whether in cash or in kind, will be exempt :-- (i) Those in pursuance of any award instituted in public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government in this behalf. (ii) Those given as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in public interest. As a result of these amendments, there is no need now to mention in the Act the various awards and rewards granted or instituted by the Central or State Governments or to mention their purposes. 3.33 Omission of clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) by the Amending Act, 1987, and their restoration, with adequate safeguards against misuse, by the Amending Act, 1989.--The Amending Act, 1987, omitted the following clauses of section 10 :-- (i) Clause (21), which exempted the income of a scientific research association. (ii) Clause (23), which exempted the income of a sports association or institution. (iii) Sub-clauses (iv) and (v) of clause (23C) which exempted the income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution. The provisions of these clauses, after incorporating appropriate amendments, along with modified provisions of sections 11 to 13, were contained in a new section 80F inserted by the Amending Act, 1987. However, following representations in this regard, the Amending Act, 1989, has omitted the new section 80F and has restored back the said clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) of section 10 (refer to items 1, 2 and 6 of the Table given in para 2.4 ante). 3.34.The Amending Act, 1989, has further substituted new clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) with effect from 1st April, 1990.--The new clauses and sub-clauses contain adequate safeguards against the misuse of exemptions provided therein. These are discussed in the following paras. 3.35 Provisions of the new clause (21) relating to exemption of income of a scientific research association.--The new clause (21) exempts the income of a scientific research association, which is approved for the purposes of clause (ii) of sub-section (1) of section 35. However, the exemption is subject to the following conditions :-- (i) The association should apply its income or accumulate it for application wholly and exclusively to the objects for which it is established. Provisions of sub-sections (2) and (3) of section 11, with appropriate amendments, shall apply to such accumulations. (ii) The association should not have invested or deposited its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture or any other article, as notified in the official gazette by the Board) during the previous year otherwise than in any one or more of the forms specified in section 11(5). (iii) The exemption shall not apply to any income of the association being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained in respect of such business. NOTE : The other conditions regarding making of an application for exemption to the prescribed authority, enquiry by the prescribed authority before granting the approval and the period for which the exemption can be granted have been incorporated by the amendments made to section 35 relating to allowance of expenditure on scientific research from income from business or profession (refer to para 5.4 in these explanatory notes). 3.36 Provisions of the new clause (23) relating to exemption of income of a sports association or institution.--The new clause (23) exempts the income of an association or institution established in India, which may be notified in the official gazette by the Central Government, having regard to the fact that the association or institution has as, its objects, the control, supervision, regulation or encouragement in India of the games of cricket, hockey, football, tennis or such other games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf. However, the exemption is subject to the following conditions :-- (i) The conditions regarding application of income, investment of funds in assets specified in section 11(5) and income from business are essentially the same as those in the case of clause (21) relating to scientific research associations, which have been enumerated at serial Nos. (i) to (iii) in the preceding para. It is, however, provided in this clause that if any funds invested or deposited before 1st April, 1989, in any form or mode, other than that specified in section 11(5) are invested or deposited in the form or mode specified in section 11(5) by 30th March, 1990, the exemption under this clause shall not be denied in respect of such funds. (ii) The association or institution should not distribute any part of its income in any manner to its members except as grants to any association or institution affiliated to it. (This condition was also there in the old provisions of the clause). (iii) The association or institution should make an application in the prescribed form and manner to the prescribed authority for the purposes of grant of such exemption or continuance thereof. (iv) Before notifying the association or institution for the purposes of exemption under this clause, the Central Government may, for satisfying itself about the genuineness of the activities of the association or institution, call for such documents (including audited annual accounts) or information from the association or institution as it thinks necessary. The Government may also make such enquiries as it may deem necessary in this behalf. (v) The notification granting exemption under this clause shall, at any one time, have effect for not more than three assessment years (including an assessment year or years commencing before the date of issue of such notification), as may be specified in the notification. 3.37 Provisions of the new sub-clauses (iv) and (v) of clause (23C) relating to exemption of income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution.--The new sub-clauses (iv) and (v) of clause (23C) empower the Central Government to notify in the Official Gazette :-- (a) any fund or institution established for charitable purposes, having regard to its objects and importance throughout India or throughout any State or States ; and (b) any trust or institution, which is either wholly for public religious purposes or wholly for public religious and charitable purposes having regard to the manner in which its affairs are administered and supervised to ensure that its income is properly applied for the purposes thereof. for the purposes of exempting the income of such fund, institution or trust. 3.38 Thus, the main provisions of the said new sub-clauses (iv) and (v) of clause (23C) are essentially the same as those of the old sub-clauses (iv) and (v). However, a number of conditions have been laid down in the new sub-clauses (iv) and (v) which must be satisfied before exemption under these sub-clauses can be granted or continued. Thus, while there was only one proviso to the old sub-clauses (iv) and (v), which provided that the notification issued under those clauses shall have effect for such assessment year or years as is specified in the notification, there are six provisos to the new sub-clauses (iv) and (v), which lay down various conditions. 3.39 The conditions laid down for grant of exemption or continuation thereof under the said sub-clauses (iv) and (v) are essentially the same as those in the case of clause (23) relating to sports associations, which have been enumerated at serial Nos. (i) to (v) in para 3.36 ante, with the following difference :-- (i) The provisions of sub-sections (2) and (3) of section 11 are not made applicable to the accumulation of income by institutions, etc., exempt under sub-clauses (iv) and (v) of clause (23C), while they are applicable in the case of institutions exempt under clause (23) and also clause (21). The effect is that while scientific research and sports institutions and associations exempt under clauses (21) and (23) can accumulate, for application to their purposes, only 25 per cent. of their income without any time-limit and without fulfilling any conditions and the balance 75 per cent. for a period of 10 years after complying with certain requirements mentioned in section 11(2), there is no such embargo in the case of religious or charitable institutions, etc., exempt under sub-clauses (iv) and (v) of clause (23C). The latter can accumulate any amount out of income for application to their objects for any period of time and without having to comply with the requirements mentioned in section 11(2). The only restriction is that such accumulation must be invested in assets specified in section 11(5) and should be for the purposes connected with the objects of the institutions, etc. (ii) Being of charitable and/or religious nature, the condition mentioned at serial No. (ii) in para 3.36 ante in the case of clause (23) is not applicable in the case of sub-clauses (iv) and (v) of clause (23C). 3.40 It may be noted that while under the old provisions of the said sub-clauses (iv) and (v), a notification could have effect for any number of assessment years mentioned therein, under the new provisions the notification shall not have effect, at any one time, for more than three assessment years. 3.41 Prescribed authority for the purposes of clause (21) read with section 35, clause (23) and sub-clauses (iv) and (v) of clause (23C).--The prescribed authority for the purposes of clause (21) read with section 35 shall be the Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India, (Refer to new rule 6 substituted by the Income-tax (Eighth Amendment) Rules, 1989, issued under Notification No. S. O. 669(E), dated 23-8-1989). The prescribed authority for the purposes of clause (23) and sub-clauses (iv) and (v) of clause (23C) shall be the Director-General (Income-tax Exemptions). (Refer to new rule 2C inserted by the Income-tax (Ninth Amendment) Rules, 1989, issued under Notification No. S. O. 675(E), dated 28-8-1989). 3.42 These amendments (except the amendments indicated below) come into force with effect from 1st April, 1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. The following amendments, however, come into force from the dates mentioned against them :-- (i) Amendments to clause (10AA) of section 10, as indicated in paras 3.18 to 3.20 ante, come into force retrospectively with effect from 1st July, 1986. (ii) Amendments to section 2(24) by the Amending Act, 1989, as indicated in para 3.25 ante, come into force with effect from 1st April, 1962. (iii) Substitution of new clauses (21) and (23) and new sub-clauses (iv) and (v) of clause (23C) in section 10, as indicated in paras 3.34 to 3.40, shall come into force with effect from 1st April, 1990. (Clauses (a) to (1) of section 6 of the Amending Act, 1987). (Sub-clause (ii) of clause (a) of section 2, clauses (c), (d) and (e) of section 4 and clause (b) of section 95 of the Amending Act, 1989). TAX TREATMENT OF CHARITABLE AND RELIGIOUS TRUSTS, INSTITUTIONS ETC. 4.1 Omission of sections 11, 12, 12A and 13 by the Amending Act, 1987, and their restoration by the Amending Act, 1989 :--The Amending Act, 1987, omitted the following sections of the Income-tax Act :-- (i) Section 11, which exempted the income of charitable and religious trusts, institutions etc., subject to fulfilment of certain conditions. (ii) Section 12, which dealt with voluntary contributions received by religious or charitable trusts and institutions. (iii) Section 12A, which laid down conditions for application of the provisions of sections 11 and 12. (iv) Section 13, which enumerated the cases and circumstances in which the provisions of sections 11 and 12 did not apply. The provisions of these sections, after certain modifications, were incorporated in a new section 80F inserted by the Amending Act, 1987. However, following representations in this regard, the Amending Act, 1989, has omitted the said new section 80F and has restored back sections 11, 12, 12A and 13 (refer to items 3 and 6 of the Table given in para 2.4 ante). The Amending Act, 1989, has further made certain modifications in section 11, which are discussed in the following paras. 4.2 Amendment to sub-section (1) of section 11 by the Amending Act, 1989, to exclude corpus donations from the total income of the trust or institution and amendment of definition of "income" contained in section 2(24) by the Amending Act, 1987 :--The Amending Act, 1989, has inserted a new clause (d) in sub-section (1) of section 11 to provide that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall be excluded from the total income of the trust or institution. For understanding the background of this amendment, it will be relevant to discuss the amendment made to the definition of the term "income" in section 2(24) by the Amending Act, 1987. 4.3 Under the old provisions of sub-clause (iia) of clause (24) of section 2, any voluntary contribution received by a charitable or religious trust or institution with a specific direction that it shall form part of the corpus of the trust or institution was not included in the income of such trust or institution. Since this provision was widely being used for tax avoidance by giving donations to a trust in the form of corpus donations so as to keep this amount out of the regulatory provisions of sections 11 to 13, the Amending Act, 1987, amended the said sub-clause (iia) of clause (24) of section 2 to secure that all donations received by a charitable or religious trust or institution, including corpus donations, were treated as income of such trust or institution. However, under the provisions of the new section 80F, also introduced by the Amending Act, 1987, such corpus donations, along with other income of the trust or institution, would have been exempt if spent for charitable purposes or invested in specified assets mentioned in section 80F. 4.4 As already pointed out, the Amending Act, 1989, omitted the new section 80F introduced by the Amending Act, 1987, and revived the old section 11. Consequently, corpus donations to trusts, etc., would also be governed by the provisions of section 11. Since stipulations in clauses (a) and (b) of sub-section (1) of section 11 that 75 per cent. of the income of the trust should be spent during the year and only 25 per cent. can be accumulated for application to its purposes in future could not have been made applicable to corpus donations, the Amending Act, 1989, has further amended section 11 to exclude corpus donations from the total income of the trust, as explained in para 4.2 above. 4.5 The effect of the amendment of the definition of "income" contained in section 2(24) by the Amending Act, 1987 and the amendment of sub-section (1) of section 11 by the Amending Act, 1989, is that although corpus donations would be treated as income in the hands of the recipient, in the case of trusts or institutions, which comply with the requirements for exemption under section 11, these will be excluded from their income. However, in case the trust or institution loses the exemption under section 11, either by not complying with the conditions laid down in section 12A or by falling within the mischief of section 13, corpus donations will be included in its income and taxed. 4.6 Consequential amendments in sections 2(24) and 11(1) by the Amending Act, 1989 :--The Amending Act, 1989, has also made the following amendments :-- (i) Consequential amendments in the definition of "income" contained in section 2(24) pursuant to the omission of section 80F and revival of clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) of section 10. (ii) Consequential amendments in section 11(1) pursuant to the amendment of sub-section (1) of section 139 and the omission of sub-section (2) of section 139. 4.7 Amendments to sub-section (5) of section 11 by the Amending Act, 1989, to expand the scope of specified assets for purposes of investment of accumulated income of trusts, etc. :--Sub-section (5) of section 11 enumerates the forms and modes of investing or depositing the money referred to in section 11(2)(b), i.e., 75 per cent. of the income of the trust which is accumulated for application to the purposes of the trust in future. The Amending Act, 1989, has amended the said sub-section (5) to expand its scope as follows :-- (i) in place of "Government companies" as defined in section 612 of the Companies Act, 1956, public sector companies have been included in the list of institutions where investments or deposits can be made. (ii) A new clause (xii) has been inserted which empowers the Central Government to prescribe any other form or mode of investment or deposit for the purposes of this sub-section. Thus, for future expansion of the scope of sub-section (5) of section 11, amendment of the Act will not be necessary. It can be prescribed in the rules. 4.8. These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (j) of section 3 and section 7 of the Amending Act, 1987] [Sub-clause (i) of clause (a) of section 2, section 5 and clause (c) of section 95 of the Amending Act, 1989] EXPENDITURE-LINKED CONCESSIONS FOR COMPUTING INCOME FROM BUSINESS OR PROFESSION 5.1 Omission of sections 35, 35B, 35C, 35CC, 35CCA and 35CCB by the amending Act, 1987.--The Amending Act, 1987, omitted the following sections of the Income-tax Act for reasons mentioned against each : (i) Section 35 relating to deduction for expenditure on scientific research, as deduction for payments made to scientific research associations was to be allowed under the provisions of section 80G, as amended by the Amending Act, 1987, read with the provisions of the new section 80F, also inserted by the Amending Act, 1987. (ii) Section 35B relating to weighted deduction in respect of expenditure incurred for promoting exports, as the concessions had already been withdrawn by the Finance Act, 1983, in respect of expenditure incurred after February 28, 1983. (iii) Section 35C relating to deduction for expenditure on agricultural development, as the concessions had already been withdrawn by the Finance Act, 1984, in respect of expenditure incurred after February 28, 1984. (iv) Section 35CC relating to deduction for expenditure on an approved programme of rural development as the concessions had already been withdrawn by the Finance Act, 1985, in respect of expenditure on programmes not approved till March 16, 1985. (v) Sections 35CCA and 35CCB relating to deductions for expenditure by way of payments to associations and institutions for carrying out rural development programmes or programmes of conservation of natural resources, as deductions for such payments were to be allowed under the provisions of section 80G, as amended by the Amending Act, 1987, read with the provisions of the new section 80F, also inserted by the Amending Act, 1987. 5.2. Restoration of sections 35, 35CCA and 35CCB by the Amending Act, 1989.--Following representations against the provisions of the new section 80F and also against the omission of section 35, the Amending Act, 1989, has omitted the new section 80F, has reversed the corresponding amendments to section 80G and has restored back sections 35, 35CCA and 35CCB (refer items 4, 6 and 7 of the Table given in para 2.4 ante). The Amending Act, 1989, has further amended section 35 to provide adequate safeguards against the misuse of the provisions of that section. These are discussed in the following paras. 5.3. Amendments to section 35(1) by the Amending Act, 1989, to provide safeguards against the misuse of the provisions of the section.--Under the old provisions of clauses (ii) and (iii) of sub-section (1) of section 35, any sums paid for research were allowed as deduction from profits and gains of business or profession, if the payments were made to :-- (i) a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research ; (ii) a university, college or other institution to be used for research in social science or statistical research related to the class of business carried on. In both the cases such association, university, college or institution had to be approved by the prescribed authority. The Amending Act, 1989, has amended both the said sub-clauses (ii) and (iii) to provide that such approval by the prescribed authority shall be made by notification in the Official Gazette. Note :--As explained in para 3.41 ante, under the new rule 6 inserted in the Income-tax Rules, the prescribed authority for this purpose shall be the Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India. 5.4. The Amending Act, 1989, has further inserted three provisos in sub-section (1) of section 35 to provide the following conditions for approval or continuance of approval by the prescribed authority under clauses (ii) and (iii) :-- (i) The scientific research association, university, college or institution should make an application in the prescribed form and manner to the prescribed authority for the purposes of grant of such approval or continuance thereof. (ii) Before granting the approval, the prescribed authority may, for satisfying itself about the genuineness of the activities of the scientific research association university, college or institution, call for such documents (including audited annual accounts) or information from the said association, university, college or institution as it thinks necessary. The prescribed authority may also make such enquiries as it may deem necessary in this behalf. (iii) The notification granting approval shall, at any one time, have effect for not more than three assessment years (including an assessment year or assessment years commencing before the date of issue of such notification), as may be specified in the notification. 5.5. These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 10 of the Amending Act, 1987] [Section 8 and clause (e) of section 95 of the Amending Act, 1989] COMPUTATION OF INCOME UNDER THE HEAD "PROFITS AND GAINS OF BUSINESS OR PROFESSION" 6.1. Under the old provisions of the Income-tax Act, the computation of taxable income under the head "Profits and gains of business or profession" deviated considerably from the concept of commercial profits or real income. This was because of certain provisions in the Act, which disallowed expenses actually incurred or laid down artificial ceilings on allowable business expenses. With a view to bring the taxable income closer to the real income, the Amending Act, 1987, has either amended or omitted some of the provisions of the Act, which put restrictions on the allowability of business expenses. These are indicated below : (i) Provisions relating to allowability of bonus are amended. [Sections 36(1)(ii) and 43B] (ii) Provisions relating to allowability of bad debts are amended. [Sections 36(1) (vii) and 36(2)] (iii) Provisions which lay down ceilings on remuneration of directors in the case of companies are omitted. [Section 40(c)] (iv) Provisions which lay down ceilings on remuneration of employees or former employees are omitted. [Section 40A(5) and (6)] Certain other amendments have also been carried out either to remove the redundant provisions or to rationalise the computation of income from business or profession, such as omission of Explanation 1 to section 28 and section 39 relating to managing agency commission and amendment of section 40A(3) relating to restrictions regarding the manner in which the payments for expenses should be made. All the above amendments, i.e., amendments to sections 28, 36, 40, 40A, 43B and omission of section 39 are discussed in detail in the following paras. 6.2 Omission of provisions relating to managing agency commission (Explanation 1 to section 28 and section 39).--The managing agency system having been abolished long back, the provisions in the Income-tax Act regarding managing agency for computing income under the head " Profits and gains of business or profession ", had also lost their relevance. The Amending Act, 1987, has, therefore, omitted the following :-- (i) Explanation 1 to section 28, which provided that the profits and gains of business shall include the profits and gains of managing agency. (ii) Section 39, which provided for the sharing of the managing agency commission by the managing agent with a third party or third parties. 6.3 Amendments to sections 36(1)(ii) and 43B to rationalise provisions regarding allowability of bonus and commission payments.--The old provisions of clause (ii) of sub-section (1) of section 36 provided for allowance of bonus or commission paid to an employee subject to certain conditions laid down in the two provisos to the said clause (ii). The first proviso laid down the condition that deduction in respect of bonus paid to an employee governed by the Payment of Bonus Act, 1965, shall not exceed the amount of bonus payable under that Act. The second proviso laid down that the amount of bonus in case of employees not governed by the Payment of Bonus Act or the amount of commission should be reasonable with reference to the pay of the employee, the conditions of his service, the profits of the business for the year in question and the general practice in similar business or profession. 6.4 Instances have occurred where payments to employees governed by the Payment of Bonus Act were made in excess of the statutory amounts for reasons of business expediency. A claim for the balance amount in such cases was generally made under the provisions of section 37(1) which allows all expenses incurred wholly or exclusively for the purposes of business. This led to litigation. The conditions laid down by the second proviso in case of payment of bonus to employees not governed by the Bonus Act or payment of commission also led to protracted litigation on the issue. In order to avoid litigation and uncertainty in the matter and also to bring rationality to the provisions, the Amending Act, 1987, has omitted both the provisos to clause (ii) so that bonus or commission paid by the employer to the employees will be allowed without any restriction. Of course, if unreasonably excessive payments are made to relatives or connected persons, the same can be disallowed under the provisions of section 40A(2). 6.5 To ensure that the liberalised provisions regarding payment of bonus and commission are not abused, the Amending Act, 1987, has simultaneously restricted the allowability of these payments to the amount actually paid in a particular year by amending section 43B. Thus, a new clause (c) has been inserted in that section to bring bonus and commission payments within its ambit so that deduction is allowed only in the year in which these are actually paid. The first proviso introduced in the section by the Finance Act, 1987, has also been amended so that bonus and commission payments will also be allowed only if the payment in respect thereof is made before the due date of filing the return of income, and evidence of such payment is attached with such return of income. By inserting Explanation 2 in the section, it has been clarified that if deduction in respect of any bonus or commission payment has already been allowed in the assessment year 1988-89 or any earlier assessment year on due basis, the deduction shall not be allowed again in the year in which the same is actually paid. 6.6 Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts.--The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the Assessing Officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987, has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee. 6.7 Clauses (iii) and (iv) of sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write-off. The Amending Act, 1987, has, therefore, amended these clauses to withdraw them after the assessment year 1988-89. 6.8 Amendments to section 36(1)(viia) to include definition of " scheduled bank " therein.--Under the provisions of clause (viia) of sub-section (1) of the section, deduction is allowed to scheduled as well as non-scheduled banks in respect of provisions for bad and doubtful debts relating to rural advances. Clause (ii) of the Explanation to this clause defined " scheduled bank " to have the same meaning as in the Explanation to section 11(5)(iii). Since the Amending Act, 1987, omitted section 11, the definition of " scheduled bank ", as given therein, has been shifted and incorporated in the Explanation to section 36(1)(viia) itself. It has further been clarified that " scheduled bank " does not include a co-operative bank. This definition of " scheduled bank " stays in section 36(1)(viia) in spite of the fact that section 11 containing the definition of " scheduled bank " has been revived by the Amending Act, 1989. 6.9 Amendments to section 40 relating to certain amounts not deductible in computing the income under the head " Profits and gains of business or profession ".--The provisions of this section dealt with amounts not deductible in computing the income chargeable under the head " Profits and gains of business or profession ". The Amending Act, 1987, has made the following amendments in this section :-- (i) Consequential amendments made in the opening portion of the section pursuant to the omission of section 39. (ii) Substitution of clause (b) which disallows payment of interest, salary, etc., by a firm to its partners, by two new clauses (b) and (ba) is discussed in the later portion of these explanatory notes under the head " New scheme of assessment of association of persons and body of individuals " (refer to paras 11.4 and 11.5 of these Explanatory Notes). (iii) Under the provisions of clause (c) of the section, a ceiling was imposed on the remuneration and perquisite paid by a company to its directors and certain connected persons. This clause has been omitted so that the artificial ceiling is now removed. Even otherwise, there was not much rationale for this ceiling, as a company can pay such remuneration, etc., only after getting the approval of the Company Law Board. However, if the remuneration paid is excessive or unreasonable having regard to the services rendered by the directors or the connected persons, the same can still be disallowed under the provisions of section 40A(2). 6.10 Amendment to section 40A(3) relating to mode of payment for expenses.--The old provisions of sub-section (3) of the section required payments in respect of expenditure, which exceeded Rs. 2,500 to be made by a crossed cheque or a crossed bank draft. On failure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987, has raised this ceiling to Rs. 10,000. 6.11 Omission of sub-sections (5) and (6) of section 40A.--Sub-section (5) of the section laid down ceilings on the remuneration and perquisites paid by any assessee to its employees or former employees. Sub-section (6) laid down the ceiling upto which any expenditure by way of fees for services rendered by a person, who at any time during the period of 24 months immediately preceding the previous year was an employee of the assessee could be allowed. The Amending Act, 1987, has omitted both these sub-sections. Consequently, the artificial ceilings laid down on the remuneration or fees payable to employees or former employees of an assessee are removed. However, if excessive or unreasonable payments are made to relatives or connected persons, the same can still be disallowed under the provisions of section 40A(2). 6.12 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent assessment years. [Clause (b) of section 9 and sections 11 to 15 of the Amending Act, 1987] PROVISIONS RELATING TO CLUBBING OF INCOME OF SPOUSE, MINOR CHILD, SON'S WIFE AND SON'S MINOR CHILD WITH ASSESSEE'S INCOME 7.1 Certain amendments to section 64(1) by the Amending Act, 1987, which have been withdrawn by the Amending Act, 1989.--Sub-section (1) of section 64 lays down various circumstances under which the income of family members, namely, spouse, minor child, son's wife and son's minor child are clubbed with the income of the assessee. The Amending Act, 1987, made the following amendments to the said sub-clause (1) :-- (i) Omission of clauses (i) and (iii) and other consequential amendments pursuant to the new scheme of assessment of firms and partners.--Clauses (i) and (iii), which provided for clubbing of the share income of the spouse or minor child from a firm with the assessee's income, were omitted, as the provisions of these clauses became redundant in view of the new scheme of assessment of firm and partners, which also was introduced by the Amending Act, 1987. Pursuant to the omission of the said clauses (i) and (iii), consequential amendments were also made in clauses (iv) and (v) and Explanations 1 and 3. Further, Explanations 1A and 2A, which related to the said clauses (i) and (iii), were also omitted. (ii) Amendment of clause (ii).--Clause (ii) provides that the income derived by the spouse of an individual by way of remuneration, etc., from a concern in which the individual has a substantial interest shall be clubbed with the income of the said individual. A provision to this clause, however, provided that the said clause shall not apply where the spouse possessed technical or professional qualifications. The Amending Act, 1987, substituted this provision by a new proviso, which provided that the said clause shall not apply only where the remuneration, etc., was received by the spouse from a firm carrying on profession referred to in section 44AA(1) and the spouse possessed any technical or professional qualification in the nature of a degree or diploma of a university. 7.2 Following representations against the new scheme of assessment of firm and partners and also against the provisions of the new proviso to clause (ii) of section 64(1), the Amending Act, 1989, has withdrawn the new scheme of assessment of firm and partners and the new proviso to clause (ii) of section 64(1). Consequently, all the amendments to section 64(1), as mentioned in the preceding para, have been reversed (refer to item 6 of the Table given in para 2.3 ante). Thus, the old provisions of clauses (i), (ii) and (iii) of section 64(1) along with Explanations 1A and 2A have been restored. 7.3 Other amendments to section 64(1) by the Amending Act, 1987, which have not been withdrawn by the Amending Act, 1989 :-- (i) Amendments to clauses (v) and (vii).--Clause (v) provides for clubbing of the income from assets transferred to the minor child with the income of the individual transferring the assets. Clause (vii) deals in a similar way with the assets transferred to any person or association of persons for the benefit of the spouse or minor child. Under the old provisions of the said clauses (v) and (vii), the term " minor child " was qualified by the words " not being a married daughter ". Since the use of these words was considered unnecessary, because of the requirement of the relevant law laying down the minimum age for marriage, the Amending Act, 1987, has omitted the same from both the clauses. (ii) Substitution of new Explanation 3.--Under the old provisions of Explanation 3, which applied to clauses (iv) and (v) of sub-section (1) of section 64, it was clarified that where the assets transferred by an individual to his spouse or minor child were invested in any business, the income proportionate to the investment out of transferred assets would be clubbed with the income of the transferor. The Amending Act, 1987, has substituted a new Explanation 3, which, in addition to clauses (iv) and (v), also applies to clause (vi) relating to assets transferred by an individual to his son's wife or son's minor child, so that, where such transferred assets are invested in any business, proportionate income therefrom would also be clubbed with the income of the transferor. This amendment has removed a lacuna in the old provisions of Explanation 3. 7.4 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Section 17 of the Amending Act, 1987] [Section 11 and clause (g) of section 95 of the Amending Act, 1989] DEDUCTIONS TO BE MADE IN COMPUTING TOTAL INCOME 8.1 Chapter VIA of the Income-tax Act deals with deductions to be made in computing total income. This Chapter contains a number of sections (sections 80A to 80U) which provide for different types of deductions from total income to achieve various objectives, such as promotion of savings, exports, industrial growth, scientific research, charity, etc. The Amending Act, 1987, has amended or omitted some of the sections of this Chapter. A new section 80F inserted by the Amending Act, 1987, has, however, been omitted by the Amending Act, 1989. All these amendments are discussed in the following paras. 8.2 Amendments to section 80A, containing general principles regarding deductions allowable under Chapter VIA, by the Amending Act, 1987 and their reversal by the Amending Act, 1989.--Under the old provisions of sub-section (3) of section 80A, where deductions under certain sections of Chapter VIA, mentioned in the said sub-section (3), were allowed in the case of a firm, association of persons or body of individuals, the same deductions would not be allowed in the assessments of the partners or members in respect of shares from such firm, association or body. The Amending Act, 1987, substituted a new sub-section (3) after making the following amendments :-- (i) Reference to a firm and its partners was omitted from the new sub-section (3), as under the new scheme of assessment of firm and partners introduced by the Amending Act, 1987, such a reference was not necessary in the said sub-section (3). (ii) Since section 80T had already been omitted by the Finance Act, 1987, and sections 80GGA and 80QQ were being omitted by the Amending Act, 1987, references to these sections were omitted from the new sub-section (3). 8.3 The Amending Act, 1989, has withdrawn the new scheme of assessment of firm and partners and has also restored section 80GGA. The Amending Act, 1989, has, therefore, withdrawn the above amendments to sub-section (3) of section 80A made by the Amending Act, 1987, except omission of references to sections 80QQ and 80T (refer to item 10 of the Table given in para 2.3 ante). 8.4 Omission of certain " definitions " from Chapter VIA (Amendment of section 80B).--The Amending Act, 1987, has omitted the following definitions from section 80B :-- (i) Definitions of " domestic company " and " foreign company " as both these definitions have been shifted to section 2 by the Amending Act, 1987. Consequently, these definitions will now be valid for the purposes of the entire Income-tax Act, instead of for Chapter VIA only. (ii) Definitions of " income " in relation to a handicapped individual and " relative ", as both these definitions are no longer necessary. These definitions were needed for the purposes of the old section 80D dealing with deduction in respect of medical treatment of handicapped dependants, which was omitted by the Finance Act, 1984. 8.5 Omission of sections 80E and 80QQ.--The Amending Act, 1987, has omitted the following sections for reasons mentioned against them :-- (i) Section 80E, which provided for deduction in respect of payments for securing retirement annuity in the case of a partner of a registered professional firm, as the provisions of the section had already become redundant. The Finance Act, 1984, had amended this section to provide that payments made after 29th February, 1984, would not qualify for deduction under this section. (ii) Section 80QQ, which provided for deduction in respect of profits and gains from the business of publication of books as the provisions of the section had already become redundant. The provisions of the sections were applicable to the assessment year 1971-72 and subsequent 14 assessment years, i.e., only upto the assessment year 1985-86. 8.6 Insertion of new section 80F by the Amending Act, 1987, and its omission by the Amending Act, 1989.--The Amending Act, 1987, inserted a new section 80F in the Income-tax Act containing a unified scheme for tax treatment of charitable and religious trusts and institutions and also institutions of national importance, including those involved in scientific research, sports, rural development and conservation of natural resources. However, following representations against the provisions of the new section 80F, the Amending Act, 1989, has omitted the same. (Refer to item 6 of the Table given in para 2.4 ante and also paras 3.33, 4.1, 5.1 and 5.2 ante). 8.7 Amendments to section 80G by the Amending Act, 1987, and reversal of most of the amendments by the Amending Act, 1989.--Section 80G provides for deduction in respect of donations to certain funds and charitable institutions while computing the total income of an assessee. The Amending Act, 1987, made the following amendments in this section :-- (i) Consequent upon the omission of clauses (21), (23) and sub-clauses (iv) and (v) of clause (23C) of section 10 and sections 11 to 13 and their replacement by a new section 80F, amendments were also made in section 80G to bring the provisions of this section in line with those of the new section 80F. Further consequent upon the omission of sections 35, 35CCA, 35CCB and 80GGA, the provisions of those sections, with appropriate amendments, were also incorporated in section 80G. For these purposes, amendments were carried out in sub-sections (1), (2) and (5) and Explanation 2 of the section. (ii) Sub-section (4) lays down the ceiling upto which certain donations mentioned in sub-section (2) of the section can qualify for deduction. Under the old provisions of the sub-section, this ceiling was 10 per cent. of the gross total income or Rs. 5 lakhs, whichever was less. A new sub-section (4) has been substituted, which does not contain the ceiling of Rs. 5 lakhs. The effect is that the aforesaid donations will now be subject to only one upper limit, i.e., 10 per cent. of the gross total income. 8.8 Following representations against the provisions of the new section 80F, the Amending Act, 1989, has omitted the new section 80F and has revived the old sections 10(21), 10(23), 10(23C)(iv) and (v) and 11 to 13 with certain modifications mentioned in paras 3.35 to 3.41 and 4.2 to 4.7. Consequently, the Amending Act, 1989, has also reversed the amendments made to various sub-sections and Explanation 2 of section 80G, as detailed at serial No. (i) in the preceding para. The Amending Act, 1989, has also revived section 35 with suitable modifications and sections 35CCA, 35CCB and 80GGA (refer to items 6, 7 and 8 of the Table given in para 2.4 ante). 8.9 The net effect is that only the amendment made to sub-section (4) of section 80G, as described at serial No. (ii) of para 8.7 ante, survives. 8.10 Omission of section 80GGA by the Amending Act, 1987, and its restoration by the Amending Act, 1989.--The Amending Act, 1987, omitted section 80GGA (which provided for deduction in respect of certain donations for scientific research or rural development or conservation of natural resources, as its provisions were incorporated in the amended section 80G read with the new section 80F. However, as explained in para 8.8 ante, following the omission of the new section 80F and the reversal of the amendments to section 80G, the Amending Act, 1989, has also restored the old section 80GGA. 8.11 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clauses (h) and (i) of section 3, sections 21 to 26 and 28 of the Amending Act, 1987.] [Sub-clause (b) of clause (1) of section 57 and clauses (g) and (h) of section 95 of the Amending Act, 1989]. POWERS OF INCOME-TAX AUTHORITIES 9.1 Amendment of the provisions conferring powers of a civil court in certain matters on the income-tax authorities (Section 131).--Under the old provisions of sub-section (1A) of section 131, the powers of a civil court in certain matters like enforcing attendance of witnesses and examining them on oath, compelling the production of books of account and documents, etc., which are normally exercised by the Assessing Officers and appellate or revisionary authorities under the provisions of sub-section (1), were also conferred on an Assistant Director of Inspection, who generally deals with searches and seizures, and enabled him to exercise the powers even when no proceedings were pending. However, these powers were not available to the Directors and the Deputy Directors, who are generally associated with investigation of cases and intelligence work in connection with searches and seizures under section 132. Another difficulty felt was that an authorised officer could record a statement on oath only during the course of search under the provisions of section 132(4). Sometimes it becomes necessary to record a preliminary statement before the commencement of the search for proper investigation. This was not possible, as the courts had held that such a preliminary statement before the search could not be recorded under the provisions of section 132(4). 9.2 To overcome these difficulties, the Amending Act, 1987, has amended the said sub-section (1A) to extend similar powers to the Director-General or Director. As per the new definition of " Director-General or Director " in section 2(21), the term also includes a Deputy Director and an Assistant Director. Thus, the powers have been extended to the Director-General, Director, Deputy Director the Assistant Director. The Amending Act, 1987, has further extended the powers to an authorised officer under sub-section (1) of section 132 before he takes search and seizures action under clauses (i) to (v) of that sub-section. NOTE (1) : The Finance Act, 1988, has further amended the said sub-section (1A) to-- (i) specially mention Deputy Director and Assistant Director also in the sub-section, leaving no doubt in the matter ; (ii) provide that these amendments of the sub-section would come into effect from June 1, 1988. Clause (a) of section 33 and clause (a) of section 88 of the Finance Act, 1988. NOTE (2) : For further amendments to section 131 by the Finance Act, 1988, refer to para 33.2 of the Explanatory Notes on the Finance Act, 1988 (Circular No. 528 (See [1988] 176 ITR (St.) 154)). 9.3 The old provisions of sub-section (2) of section 131 provided for imposition of fine on a person for non-compliance with a summons issued under this section. Consequent upon the inclusion of this penal provision in section 272A dealing with miscellaneous penalties, the Amending Act, 1987, has omitted the said sub-section (2). 9.4 Amendments of the provisions relating to search and seizure (section 132).--Section 132 deals with search and seizure. Sub-sections (1) and (1A) of this section empowered the authorised officer, who is conducting the search, to seize the books of account, documents, money, bullion, jewellery or other valuable articles or things found during the search, if the same are unaccounted for. The Amending Act, 1987, has made amendments of consequential nature in these sub-sections pursuant to the changes in the designations and jurisdiction of income-tax authorities. NOTE : The Finance Act, 1988, has further clarified that these amendments would come into force with effect from 1st April, 1988 [clause (b) of section 88] of the Finance Act, 1988. 9.5 Sub-section (3) empowers the authorised officer to issue a prohibitory order on a person in control of books of account, documents, valuable articles, etc., directing him not to remove, part with or otherwise deal with them without his permission, if he finds it not practicable to seize them. It is clearly the intention of the Government that the issue of such a prohibitory order does not amount to seizure. However, various High Courts have differed on the point as to whether the issue of a prohibitory order under sub-section (3) amounts to seizure or not. While the Punjab and Delhi High Courts held that it did not amount to seizure [O. P. Jindal v. CIT [1976] 104 ITR 389] and Mrs. Kanwal Shamsher Singh v. Union of India [1974] 95 ITR 80], the Bombay High Court held in a case that the effect of the prohibitory order under section 132(3) is in essence to bring out a seizure of articles and things and so it would amount to seizure [N. M. R. Gillani v. CIT (1976) Tax LR 688]. In order to put an end to the controversy arising out of the differences of judicial pronouncements and to make the intention of the Government clear, the Amending Act, 1987, has inserted an Explanation to sub-section (3) to clarify that a prohibitory order under this sub-section does not amount to seizure. 9.6 Further, there is no time limit upto which such a prohibitory order can be in force. This causes inconvenience to the assessee, as the authorised officer can keep the books of account, documents, valuable articles, etc., under prohibitory order for an indefinite period and there is no recourse left to the person, if the prohibitory order continues for an unduly long period. Several courts have held that the absence of mention of time limit in section 132(3) does not mean that the authorised officer can subject any asset to such prohibition for an indefinite period of time. To remove this difficulty, the Amending Act, 1987, has introduced a new sub-section (8A) in the section to provide that a prohibitory order will not be operative for a period exceeding 60 days from the date of the order unless the authorised officer records reasons in writing and obtains the approval of the Commissioner to such extension. It is further provided that the Commissioner shall not approve the extension of the period beyond the expiry of 30 days after the completion of all the proceedings under the Act in respect of the years for which the books of account, documents, money, bullion, jewellery or other valuable articles or things are relevant. 9.7 Sub-section (4) empowers the authorised officer to examine on oath any person found to be in possession or control of any books of account, documents, valuable articles, etc., during the search. The Bombay High Court has held that the power to interrogate on oath conferred by the said sub-section (4) is not for the purposes of general investigation, but for the limited purpose of seeking examination of things found during the search. This restrictive interpretation rendered the examination on oath during the search operations practically ineffective. To get over this difficulty, the Amending Act, 1987, has inserted an Explanation in sub-section (4) to clarify that examination on oath mentioned therein need not be confined to the books of account, other documents or assets found during the search, but can also be for the purposes of investigation connected with any proceedings under the Act. 9.8 Sub-section (5) provides that where any money, valuable articles, etc., have been seized, the Income-tax Officer has to pass a summary order within 120 days of the seizure, estimating the extent of the concealed income and calculating the amount of tax, penalty and interest thereon, and appropriate the seized assets against the liability so determined or against any other existing liability of the assessee. Explanation 1 at the end of the section provides that the period of stay or injunction order by a court is to be excluded in computing the limit of 120 days mentioned in sub-section (5). The mention of " 120 days " in Explanation 1 is not necessary and the purpose will be served by making a reference to the period referred to in sub-section (5). The Amending Act, 1987, has, therefore, made the necessary amendment to Explanation 1. The effect is that amendment of the Explanation will not be necessary if the period of 120 days mentioned in sub-section (5) is enhanced or reduced subsequently. NOTE :-- For further amendments to section 132 by the Finance Act, 1988, refer to paras 34.1 to 34.3 of the Explanatory Notes on the Finance Act, 1988 (Circular No. 528) (See [1988] 176 ITR (St.) 154). 9.9 Consequential amendments to section 132A relating to powers to requisition books of account, etc.--The Amending Act, 1987, has made amendments of consequential nature in this section pursuant to the changes in designations of income-tax authorities. NOTE:-- The Finance Act, 1988, has further clarified that these amendments would come into force with effect from 1-4-88 [clause (c) of section 88 of the Finance Act, 1988]. 9.10 Amendments of the provisions relating to powers of income-tax authorities to call for information (section 133).--Under the old provisions of clause (4) of the section, the income-tax authorities mentioned in the section were empowered to call upon any assessee to furnish a statement of the names and addresses of all persons to whom he had paid in any previous year rent, interest, commission, royalty, brokerage or any annuity (except annuity taxable under the head " Salaries ") together with particulars of the payment, if such payment exceeded Rs. 400. This monetary limit being very small, the Board, after consideration of various representations received in this regard, issued a circular on 15th June, 1977 (See Circular No. 223, dated 15-6-1977 : 108 ITR (St.) 21), raising the limit to Rs. 1,000 although in the statute the amount mentioned continued to be Rs. 400 only. To remove this anomaly, the Amending Act, 1987, has amended the said clause (4) of the section to raise the limit to Rs. 1,000 and has further empowered the Board to raise the limit through rules, so that amendment of the Act will not be necessary, if at any time in future, the limit is to be raised further. 9.11 Under the old provisions of clause (6) of the section, the income-tax authorities mentioned in the section, namely, the Assessing Officer, the Deputy Commissioner (Appeals), the Deputy Commissioner and the Commissioner (Appeals) were empowered to require any person, including a bank or its officers, to provide such information or statements of account and affairs as may be useful or relevant to any income-tax proceedings. This power would also be required by the Chief Commissioner or Commissioner for taking necessary action under various provisions of the Act, particularly when they have to decide a revision application under section 264. These powers would also be required by the Director-General or Director for proper investigation or intelligence work. The Amending Act, 1987, has, therefore, inserted a proviso at the end of the section to provide that the powers referred to in clause (6) of the section can also be exercised by the Director-General, Chief Commissioner, Director and the Commissioner. 9.12 Amendment of the provisions relating to power of survey (section 133A).--Under the old provisions of clause (a) of the Explanation to the section, the income-tax authorities, who were empowered to conduct survey under the section and take various actions during the survey operations, included an Inspector of Income-tax for certain purposes, if so authorised by the Income-tax Officer. This meant that an Inspector of Income-tax could conduct survey only when so authorised by the Income-tax Officer and the Deputy Commissioner or Assistant Director could not authorise an Inspector to conduct a survey. To remove this lacuna, the Amending Act, 1987, has amended clause (a) of the Explanation to provide that instead of only the Income-tax Officer, any income-tax authority mentioned in the section can authorise the Inspector of Income-tax to conduct the survey. 9.13 Amendments of the provisions relating to disclosure of information respecting assessees (section 138).--Under the old provisions of clause (a) of sub-section (1) of the section, dealing with disclosure of information in respect of income-tax assessees, it was provided that information about " any assessee in respect of any assessment made " could be disclosed to other Central Government agencies and to the authorities under the Foreign Exchange Regulation Act, 1947, by the Board or by any income-tax authority specified by the Board. This meant that the information could be passed on only in respect of the person who was an assessee with the Department and that too when the assessment relating to information to be furnished had been completed. This restricted the free and quick exchange of information with certain Central Government Departments and agencies to fight the tax evasion effectively, because many a time, valuable information collected on account of survey or search operations or in the course of other income-tax proceedings could not be passed on to the other Departments, if the persons concerned were not already assessed to tax and their assessments were not already completed. The Amending Act, 1987, has, therefore, amended clause (a) of sub-section (1) of the section by removing the condition that the information to be passed on to the other Government Departments must relate to an assessee and to a completed assessment. Instead, it is provided that any information received or obtained by an income-tax authority in the performance of his functions under the Act may be disclosed. 9.14 Under the old provisions of clause (b) of sub-section (1) of the section, the Commissioner of Income-tax was empowered to disclose information in respect of any assessee to any person, on an application by such person in the prescribed form, if he was satisfied that it was in public interest to do so. However, the information could be disclosed only in respect of persons who were assessees and in respect of " any assessment made ". The power of the Commissioner was thus restricted and the information could not be disclosed unless the assessment had been completed. The Amending Act, 1987, has also amended clause (b) of sub-section (1) of the section so as to empower the Commissioner to disclose information relating to any assessee, received or obtained by any income-tax authority in the performance of his functions under the Act. 9.15 These amendments (except the amendments mentioned in para 9.2 which come into force with effect from 1st June, 1988, and the amendments mentioned in paras 9.4 and 9.9 which come into force with effect from 1st April, 1988), come into force with effect from 1st April, 1989. [Sections 36 to 41 of the Amending Act, 1987] LIABILITY IN SPECIAL CASES--TRUSTS, ETC., WHERE SHARES OF BENEFICIARIES UNKNOWN AND ORAL TRUSTS 10.1 Amendments to section 164 by the Amending Act, 1987, and reversal of the amendments by the Amending Act, 1989.--Section 164 provides that in the case of trusts, etc., if the individual shares of persons on whose behalf or for whose benefit the income is receivable are indeterminate or unknown, tax shall be charged at the maximum marginal rate on the entire income. The section further lays down certain circumstances under which the tax may not be charged at the maximum marginal rate. The Amending Act, 1987, made the following amendments to this section :-- (i) Sub-sections (2) and (3) of the section, which dealt with taxation of charitable or religious trusts, were omitted, as these provisions were to be covered by the new section 80F inserted by the Amending Act, 1987, which contained a comprehensive scheme of tax treatment of such charitable and religious trusts. (ii) Some consequential amendments were also carried out in sub-section (1). (iii) Explanation 2 to the section, which defined the term " maximum marginal rate ", was omitted. This was consequent upon the shifting of this definition to section 2. The result is that the definition of the term " maximum marginal rate " will now be valid for the purposes of the entire Income-tax Act. The shifting of the definition of " maximum marginal rate " to section 2 becomes necessary as tax is now to be charged at the maximum marginal rate, not only under section 164, but under some other sections of the Income-tax Act. 10.2 As already explained earlier, the Amending Act, 1989, has omitted the new section 80F. Consequently, the Amending Act, 1989, has also reversed the amendments to section 164 as detailed at serial Nos. (i) and (ii) in the preceding para. 10.3 The net effect is that only the omission of Explanation 2 to section 164, containing the definition of the term " maximum marginal rate " and the shifting of this definition to section 2 survives. 10.4 Amendment of section 164A dealing with charge of tax in the case of oral trusts.--Consequent upon the shifting of the definition of the term " maximum marginal rate " from section 164 to section 2, the Amending Act, 1987, has omitted clause (i) of the Explanation to section 164A which also defines the term " maximum marginal rate ". 10.5 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (n) of section 3 and sections 64 and 65 of the Amending Act, 1987] [Clause (k) of section 95 of the Amending Act, 1989] TAXATION OF ASSOCIATION OF PERSONS AND BODY OF INDIVIDUALS 11.1 Insertion of section 167B to tax certain association of persons and body of individuals at the maximum marginal rate.--Under the provisions of the First Schedule to the annual Finance Acts, an association of persons or body of individuals is normally taxed at the rates applicable to individuals. However, under the old provisions of section 167A of the Income-tax Act, if the shares of the members of an association of persons were indeterminate or unknown, the entire income of the association was taxed at the maximum marginal rate. Since the instrumentality of the association of persons and body of individuals had been widely used in the past for tax evasion, the Amending Act, 1987, introduced a new scheme for their taxation by inserting section 167B in the Income-tax Act, which provided that in the case of an association of persons or body of individuals, tax shall be charged at the maximum marginal rate in the following circumstances :-- (i) Where the shares of the association or body are indeterminate or unknown (this was the earlier position also). (ii) Where the shares of the members of the association or body are determinate, but any one of whose members has income above the maximum amount not chargeable to tax in the case of an individual. It was also provided that if any member of such association or body was taxable at a rate higher than the maximum marginal rate, then the entire income of the association or body would be taxed at such higher rate. NOTE :-- It may be clarified that the Amending Act, 1987, substituted the old section 167A relating to taxation of certain association of persons at the maximum marginal rate by a new section 167A, which provided for taxation of firms at the maximum marginal rate. This new section 167A has, however, been omitted by the Amending Act, 1989, which has withdrawn the new scheme of taxation of firm and partners (refer to item 14 of the Table given in para 2.3 ante). 11.2 Insertion of a new section 167B by the Amending Act, 1989.--A number of representations were received against the provisions of section 167B, as inserted by the Amending Act, 1987. It was pointed out that the provision to tax the entire income of an association of persons or body of taxable at such a higher rate would cause hardship in many cases. Some other anomalies in the provisions were also pointed out. The Amending Act, 1989, has, therefore, omitted section 167B inserted by the Amending Act, 1987, and has inserted a new section 167B in its place, which removes the hardships and anomalies of the earlier section. The provisions of the new section 167B are as under : (1) Sub-section (1) provides that where the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate. A proviso to the sub-section provides that where the total income of any member of such association or body is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged at such higher rate on the total income of the association or body. (2) Sub-section (2) provides that in the case of other association of persons and body of individuals (i.e., where the shares of the members are determinate), (i) if the total income of any member of such association or body (excluding his share from the association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member, tax shall be charged on the total income of the association or body at the maximum marginal rate ; (ii) if any member or members of such association or body is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged at such higher rate or rates only on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members and the balance of the total income of the association or body shall be taxed at the maximum marginal rate. (3) An Explanation at the end of the section explains the circumstances in which the shares of the members of the association or body in the income of such association or body shall be deemed to be indeterminate or unknown. 11.3 The effect of the provisions of the new section 167B is that only those association of persons and body of individuals will be taxed at the normal rates applicable to individuals, etc., where the shares of the members are determinate and none of the members has taxable income or none of the members is taxable at a rate higher than the maximum marginal rate. Thus, only small associations of persons or body of individuals formed by persons who, themselves are not taxable will henceforth be taxed at the normal rates. Persons who are taxable in the high income brackets or are taxable at a rate higher than the maximum marginal rate shall no longer be tempted to form an association of persons or body of individuals for being taxed at lower rates. 11.4 Amendments in the provisions of other sections connected with the taxation of association of persons, body of individuals and their members. ---The Amending Act, 1987, also amended the provisions of sections 40, 67 and 86 of the Income-tax Act to bring forward new provisions for taxation of firm and partners as well as new provisions for taxation of association of persons, body of individuals and their members in these sections. However, since the Amending Act, 1989, withdrew the new scheme of taxation of firm and partners, it also further amended these three sections to withdraw from them the new provisions relating to the taxation of firm and partners, but to retain the new provisions relating to taxation of association of persons, body of individuals and their members (refer to items 5, 7 and 11 of the Table given in para 2.3 ante). The combined effect of the amendments made by the Amending Act, 1987, and the Amending Act, 1989, in this respect is as follows : (i) A new clause (ba) has been inserted in section 40, which disallows deductions for any interest or salary, etc., paid by an association of persons or body of individuals to its members. (ii) A new section 67A has been inserted, which deals with the method of computing a member's share in the income of the association of persons or body of individuals. (iii) A new clause (v) has been substituted in section 86, which deals with the manner of taxation of share of a member of an association of persons or body of individuals. These new provisions of clause (ba) of section 40, section 67A and clause (v) of section 86 are discussed in the following paras. 11.5 Provisions of new clause (ba) of section 40. ---The new clause (ba) provides that any payment of interest, salary, bonus, commission or remuneration by whatever name called, made by an association of persons or body of individuals to a member of such association or body shall not be allowed as a deduction while computing the total income of such association or body. These provisions are on the same lines as of clause (b), which disallows such payments made by a firm to its partners. Explanations 1 to 3 in the new clause (ba) deal with the treatment of interest paid by an association or body to its members or vice versa. These Explanations are also exactly on the same lines as Explanations 1 to 3 in clause (b), which deal with the treatment of interest paid by a firm to its partners and vice versa. It may be clarified that even before the insertion of this clause, such payments made by an association of persons or body of individuals to its members were not being allowed as a deduction in the hands of the association or body, as they were regarded as payments to self. This has now been given a statutory recognition. 11.6 Provisions of new section 67A.---The new section 67A, which has sub-sections (1) to (3) and an Explanation, provides for the method of computing a member's share in the income of an association of persons or body of individuals wherein the shares of the members are determinate, in the same manner as provided for in section 67 for computing a partner's share in the income of the firm. However, the provisions of sub-section (4) of section 67, which deals with set off or carry forward of share of loss of a partner in a registered firm do not find place in section 67A, because there are no provisions in the Income-tax Act for the set off or carry forward of the share of loss of a member in an association or body in his own assessment. 11.7 The old and the new provisions of clause (v) of section 86, Under the old provisions of clause (v) of section 86 read with section 110, although the share of a member of an association of persons or body of individuals received out of the income of such association or body on which income-tax had already been paid by the association or body, was included in the total income of the member, but a rebate of tax was given on such share at the average rate of tax applicable to the total income of the member including the said share. The share of a member in the income of an association of persons was so included in his total income even where the shares of the members in the association were indeterminate so that the association had been taxed at the maximum marginal rate. For this purpose, all the members of such association were deemed to be entitled to receive an equal share in the total income of the association. 11.8 Consequent upon the insertion of a new section 167B in the Income-tax Act, which now levies tax at the maximum marginal rate on association of persons as well as body of individuals under various circumstances and even taxes them at a rate higher than the maximum marginal rate under certain circumstances, the old clause (v) of section 86 has also been substituted by a new clause (v). Under the provisions of the new clause (v) of section 86 read with section 110, the share of a member in the income of the association or body is treated in three different ways, depending upon whether the association or body is chargeable to tax at the maximum marginal rate or at the normal rate or is not chargeable to tax at all. These are :-- (i) Where the association or body is chargeable to tax at the maximum marginal rate or at a rate higher than the maximum marginal rate, the share of a member therein shall not be included in his total income at all. (ii) Where the association or body is chargeable to tax at the normal rates applicable to individuals, etc., the share of a member therein shall be included in his total income, but a rebate shall be given on the same, as was being done under the old provisions. (iii) Where no income-tax is chargeable on the total income of the association or body, the share of a member therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an association of persons or body of individuals is taxable at the normal rates applicable to individuals, etc., but has income below taxable limit so that no income-tax is chargeable on the total income of the association or body, the share of a member in such association or body shall be fully taxable in his own assessment. 11.9 Change of sub-heading " DD--Association of persons--Special cases " of Chapter XV.--The old sub-heading " DD.--Association of persons--Special cases " of Chapter XV had only one section 167A dealing with taxation of certain association of persons at the maximum marginal rate. Since the new section 167B inserted under this sub-heading now deals with taxation of certain association of persons as well as body of individuals at the maximum marginal rate, the sub-heading has also been changed to " DD--Association of persons and body of individuals ". 11.10 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (ii) of section 13, sections 17, 29 and 66 of the Amending Act, 1987] [Sections 9, 12, 17, 26, 27, 28 and clauses (f), (g) and (i) of section 95 of the Amending Act, 1989] COLLECTION AND RECOVERY OF TAX 12.1 Streamlining the procedure for recovery to make it move effective. --The Amending Act, 1987, has made a number of changes in sections 220 to 231 dealing with the procedure for collection and recovery of tax to make the provisions of these sections more effective for quicker recovery of tax. Thus, the Tax Recovery Officer (hereinafter referred to as TRO) will now be authorised by the Chief Commissioner or Commissioner of Income-tax to act as such and will work under the administrative control of the Commissioner of Income-tax. The Tax Recovery Officer shall now have concurrent jurisdiction with the Assessing Officer and the requirement of issue of tax recovery certificate by the Assessing Officer to the Tax Recovery Officer to enable the latter to assume jurisdiction over recovery in a particular case has been dispensed with. Certain other amendments have also been made in the aforesaid sections to streamline their provisions. These amendments are discussed in detail in the following paras. 12.2 Omission of the definition of " Tax Recovery Commissioner " [clause (43B) of section 2].--In some bigger charges there were separate wings of Tax Recovery Officers working under the control and supervision of Tax Recovery Commissioner. In order to bring about better co-ordination between the Assessing Officers and the Tax Recovery Officers, it was decided that the latter should work under the administrative control of the respective administrative Commissioners. Consequently, the posts of " Tax Recovery Commissioners ", being no longer necessary, have been abolished. The Amending Act, 1987, has, therefore, omitted clause (43B) of section 2 containing the definition of " Tax Recovery Commissioner ". 12.3 Amendment of the definition of Tax Recovery Officer [clause (44) of section 2]. --Under the old provisions of clause (44) of section 2, a Tax Recovery Officer was defined to mean a Collector or an Additional Collector or any other officer authorised by the State Government, by notification in the Official Gazette, to exercise the powers of a Tax Recovery Officer. It also meant any Gazetted Officer of the Central or State Government authorised by the Central Government, by notification in the Official Gazette, to exercise the powers of the Tax Recovery Officer. The inclusion of Collector or Additional Collector or other officers of the State Government within the definition of Tax Recovery Officer was a legacy of the past when arrears of direct taxes were recovered by the officers of the State Governments as arrears of land revenue. However, the Department's own machinery for recovery came into existence long back and gradually the entire work of recovery throughout the country was taken over by the Departmental officers working as Tax Recovery Officers. So, it was no longer necessary for the State Government officers to be authorised to work as Tax Recovery Officers. Further, the necessity for the issue of notification in the Official Gazette by the Board before the Departmental officers could be authorised to work as Tax Recovery Officers, caused avoidable delay and difficulties in this respect. 12.4 To remove the above difficulties and anomalies, the Amending Act, 1987, has substituted the old clause (44) by a new clause, which defines a Tax Recovery Officer to mean any Income-tax Officer authorised by the Chief Commissioner or Commissioner, by general or special order in writing, to exercise the power of the Tax Recovery Officer. Thus, Collector, Additional Collector and other State Government officials have been excluded from the definition of Tax Recovery Officer. Also, it is no longer necessary that the Tax Recovery Officer must be authorised by the Board by notification. An Income-tax Officer can now be authorised by the Chief Commissioner or Commissioner by order in writing to work as a Tax Recovery Officer. 12.5 The Amending Act, 1989, has further provided that the changed definition of Tax Recovery Officer will come into effect from 1st April, 1988. 12.6 Amendments of the provisions relating to time for Payment of tax demand and charge of interest for delayed payments (section 220). Under the old provisions of sub-section (1) of section 220, any amount specified as payable in a notice of demand under section 156 was to be paid within 35 days of the service of the demand notice on the assessee. This period of 35 days was rather odd. The Amending Act, 1987, has, therefore, amended the said sub-section (1) to provide that the specified amount shall be paid within 30 days instead of 35 days. 12.7 Under the old provisions of sub-section (2) of section 220, if the amount specified in the notice of demand was not paid within the time allowed in sub-section (1), simple interest at 15 per cent. per annum was payable by the assessee. A proviso to the said sub-section (2) provided that if the demand was reduced as a result of rectificatory, appellate or revisionary orders mentioned therein, interest would also be reduced accordingly. The Amending Act, 1987, has made the following amendments to the said sub-section (2) :--- (i) The rate of interest has been increased from 15 per cent. per annum to 1.5 per cent. per month or part of a month. This brings the interest payable for default practically at par with the market rate of interest and thus removes the temptation for not paying the Government dues. Further, the rate of interest chargeable is on the same pattern as in section 244A of the Act for payment of interest by the Department on refunds due to the assessee. NOTE : The use of the expression "part of a month" in the sub-section means that even where the delay is for part of a month, say even 1 day, interest shall be charged at 1.5 per cent. (refer to para 10.11 of Part II of these explanatory notes). (ii) The scope of the proviso to sub-section (2) has also been increased by providing that interest shall also be reduced if the demand is reduced as a result of order of the Settlement Commission under section 245D(4). (iii) A second proviso has been inserted in sub-section (2) to provide that where the duration of default includes both the period prior to 1st April, 1989, and the period subsequent to this date, calculation of interest for the earlier period will be on the basis of the old provisions (i.e., at 15 per cent. per annum) and the calculation of interest for the subsequent period shall be on the basis of the new provisions (i.e., at 1.5 per cent. per month or part of a month). 12.8 Amendments of the provisions regarding issue of recovery certificate to the Tax Recovery Officer (section 222). --Under the old provisions of section 222, the Income-tax Officer was required to forward to the Tax Recovery Officer a certificate under his signature specifying the amount of arrears due from the assessee and only then the Tax Recovery Officer assumed jurisdiction for recovering the said arrears of tax in that case. This unnecessarily delayed the commencement of recovery proceedings by the Tax Recovery Officer, as recovery certificates were generally issued by the Income-tax Officer after a lapse of more than three years when the time limit for issue of such certificates, mentioned in section 231, was to expire. To enable the Tax Recovery Officer to function more efficiently, the Amending Act, 1987, has made amendments in section 222 to dispense with the requirement of issue of recovery certificate by the Income-tax Officer. Under the amended provisions, where the assessee is in default, the Tax Recovery Officer shall assume jurisdiction by drawing up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee. Such "statement" shall continue to be called as a "certificate". 12.9 Substitution of the old sections 223, 224 and 225 by the new sections 223, 224 and 225.--The old sections 223 to 225 related to the matters indicated below : (i) Section 223 specified the Tax Recovery Officer or the Tax Recovery Officers to whom the Assessing Officer could send the recovery certificate for recovery of tax arrears in a case. Where the assessee had property within the jurisdiction of more than one Tax Recovery Officer, the recovery certificate issued to one Tax Recovery Officer could also be forwarded by that Tax Recovery Officer, if necessary, to the other Tax Recovery Officer or Tax Recovery Officers for recovery. (ii) Section 224 provided that the assessee could not object to the validity of a certificate issued by an Assessing Officer, but the Assessing Officer could withdraw, cancel or correct a clerical or arithmetical mistake in the certificate by sending an intimation to the Tax Recovery Officer. (iii) Section 225 provided for grant of time for payment of tax demand and consequent stay of recovery proceedings, notwithstanding that a recovery certificate had been issued by the Assessing Officer, and also provided for amendment or withdrawal of the recovery certificate by the Assessing Officers as a result of modification of the demand in appeal or other proceedings under the Act. 12.10 Pursuant to the amendments in section 222 (discussed in para 12.8 ante), according to which the Tax Recovery Officer shall now assume jurisdiction by drawing the recovery certificate himself, all the three old sections 223, 224 and 225 have been substituted by new sections, which empower the Tax Recovery Officer to take all these actions himself instead of the earlier position where such actions could be taken by the Assessing Officer and then intimation sent to the Tax Recovery Officer. Thus, the new sections provide as follows :--- (i) Section 223 now specifies the Tax Recovery Officer or the Tax Recovery Officers by whom the recovery is to be effected. (ii) Section 224 now provides that the assessee cannot dispute the validity of the certificate drawn by the Tax Recovery Officer, but if necessary, the Tax Recovery Officer may himself cancel the certificate or correct any clerical or arithmetical mistakes therein. (iii) Section 225 now provides for grant of time for payment of a demand under a certificate by the Tax Recovery Officer himself. Similarly, the Tax Recovery Officer can himself cancel or amend a recovery certificate pursuant to the modification of demand in appeal or other proceedings under the Act. 12.11 Thus, instead of waiting for the Assessing Officer to amend or cancel the recovery certificate as a result of any appeal or other proceedings under the Act, the Tax Recovery Officer shall now take action himself in this respect. This will quicken the recovery work as well as save the assessee the botheration of going to more than one officer, i.e., the Assessing Officer as well as the Tax Recovery Officer for settling his recovery matters. Also, the Tax Recovery Officer can himself grant time for payment of demand covered by the recovery certificate drawn by him. This power of the Tax Recovery Officer to grant time will, however, run concurrent with the power of the Assessing Officer to grant time for payment of demand under the provisions of sub-sections (3) and (6) of section 220. 12.12 Amendments of the provisions relating to other modes of recovery (section 226). --Section 226 provides for various coercive modes that can be adopted for recovery of outstanding demand, like attachment of salary, attachment of monies due from other persons (including banks) or by distraint and sale of immovable property in the manner laid down in the Third Schedule. Under the old provisions of this section, these modes of recovery could be adopted by the Assessing Officer only. The Amending Act, 1987, has, however, amended this section to provide that all the modes of recovery mentioned in this section can now be resorted to : (i) by the Assessing Officer, where no certificate of recovery has been drawn up by the Tax Recovery Officer under section 222 ; (ii) by the Tax Recovery Officer, where a certificate of recovery has been drawn up by the Tax Recovery Officer under section 222. Thus, after the Tax Recovery Officer draws up a certificate under section 222 in a case, he assumes exclusive jurisdiction to take action under the provisions of section 226 in that case. 12.13 Omission of section 228 relating to recovery of Indian tax in Pakistan and Pakistan tax in India. ---The Amending Act, 1987, has omitted section 228 which provided for reciprocal arrangements for recovery of tax due in either country from the assets of an assessee in the other country. 12.14 Consequential amendments in section 228A relating to recovery of tax in pursuance of agreements with foreign countries. --Section 228A provides for reciprocal arrangements for recovery of tax due in India and in a country with which there is an agreement for recovery of income-tax. The Amending Act, 1987, has made consequential amendments to section 228A pursuant to the amendments made to section 222 whereby the recovery certificate is now to be drawn by the Tax Recovery Officer and not by the Assessing Officer. 12.15 Amendments to sections 222 to 226, 228 and 228A by the Amending Act, 1989.--The Amending Act, 1989, has further amended sections 222, 223, 224, 225, 226, 228 and 228A and the provisions of the Amending Act, 1987, to secure that the words " Income-tax Officer " occurring in these sections, as they stood immediately before their amendment by the Amending Act, 1987, are substituted by the words " Assessing Officer " retrospectively with effect from 1st April, 1988. This was to enable the Assessing Officers (including Assistant Commissioners and Deputy Commissioners) to issue recovery certificates on 31st March, 1989, under the old provisions. However, in section 226, the amendments, which empower the Tax Recovery Officer to take action under the section, after he has drawn up a certificate of recovery under section 222 (as discussed in para 12.12 ante) shall take effect from 1st April, 1989 only. 12.16 Amendments of the provisions relating to the issue of tax clearance certificate to persons leaving India (sub-section (1) of section 230). --Under the old provisions of sub-section (1) of section 230, no person, who was not domiciled in India or who, even if domiciled in India, had in the opinion of an income-tax authority, no intention of returning to India, could leave the territory of India without obtaining a tax clearance certificate from the competent authority authorised by the Government in this behalf. In the case of persons domiciled in India, there were no clear guidelines relating to the categories of persons who should be required to obtain the tax clearance certificates before leaving India. The number of persons of Indian domicile going abroad, either as bona fide tourists or on business trips, had increased tremendously and the vague provisions of section 230(1) became an obstacle in the case of such persons. It was felt that the provisions of section 230(1) should be made more specific in this regard. 12.17 The Amending Act, 1987 has, therefore, amended sub-section (1) of section 230 to secure that a person, who is domiciled in India at the time of his departure, shall be required to obtain a tax clearance certificate only if, (i) he intends to leave India as an emigrant ; or (ii) he intends to proceed to another country on a work permit with the object of taking up any employment or occupation in that country ; or (iii) in respect of him circumstances exist which, in the opinion of an income-tax authority, render it necessary for him to obtain a tax clearance certificate. Thus, the provisions of section 230(1) have now been made more specific so that persons of Indian domicile would now be required to obtain a tax clearance certificate under this section only when they are leaving the country as emigrants or on work permits or if they are specifically required by the income-tax authority to do so. 12.18 Amendments of the provisions relating to restrictions on transfer of immovable property in certain cases (section 230A).--Under the old provisions of section 230A, a registering authority was prohibited from registering the transfer, assignment, etc., of any immovable property valued at more than Rs. 50,000 unless the person concerned, i.e., the transferor or mortgagor etc., produced a tax clearance certificate from the Income-tax Officer stating that such person had either paid or made satisfactory arrangements for the payment of the existing liabilities under the various direct taxes Acts mentioned therein. Since, keeping in view the substantial increase in the value of immovable properties, the limit of Rs. 50,000 was very low, the Amending Act, 1987, has enhanced this limit to Rs. 1,00,000. NOTE : The Finance Act, 1988, further increased this limit to Rs. 2,00,000 and made the amended provisions effective from 1st April, 1988 [section 41 and clause (d) of section 88 of the Finance Act, 1988]. 12.19 Omission of section 231 relating to the time limit for commencing recovery proceedings.--Section 231 provided that no proceedings for the recovery of any sum payable under the Act shall normally be commenced after the expiry of three years from the last date of the financial year in which the demand was made. This meant that a recovery certificate could not be issued by the Assessing Officer after the expiry of the aforesaid period. Since, with the amendment of section 222, the requirement of the issue of a recovery certificate by the Assessing Officer has been dispensed with and the Tax Recovery Officer can now draw the statement of arrears and assume jurisdiction as soon as the assessee is in default, the provisions of section 231 are no longer necessary. The Amending Act, 1987, has, therefore, omitted the same. 12.20 Amendment of the provisions of the Second Schedule relating to procedure far recovery of tax by the Tax Recovery Officer.--The recovery of outstanding tax is done by the Tax Recovery Officer according to the provisions of the Second Schedule to the Income-tax Act. The Amending Act, 1987, has made a number of changes in the Second Schedule, most of which are consequential to the amendments made in the provisions of sections 222 to 231 and also omission of sub-section (43B) of section 2 containing the definition of "Tax Recovery Commissioner" and amendments to sub-section (44) of section 2 containing the definition of "Tax Recovery Officer". Certain other changes in the provisions of the Second Schedule have also been made. 12.21 The amendments made by the Amending Act, 1987, to the Second Schedule are briefly discussed as follows :--- (i) Consequent upon the insertion of the new section 276 in the Income-tax Act providing for prosecution for certain defaults in connection with the provisions of the Second Schedule, which were hitherto provided in rule 89 of the said Schedule (refer to para 17.1 of these explanatory notes), the following amendments have been made : (1) A reference to section 276 has been included in the heading of the Second Schedule. (2) Rule 89 has been omitted. (ii) Pursuant to the amendments made to sections 222 to 225, whereby the existing requirement of issue of a recovery certificate by the Income-tax Officer has been replaced by the powers of the Tax Recovery Officer to himself draw the statement of arrears in a case for proceeding with the recovery of dues in that case and whereby the Tax Recovery Officer will himself be able to exercise the functions which were hitherto performed by the Income-tax Officer, consequential amendments have been made to rules 1, 2, 8, 9, 14, 25, 27, 31, 47, 60, 73, 74, 77, 85 and 90. (iii) Pursuant to the amendment of the definition of " Tax Recovery Officer " contained in sub-section (44) of section 2, whereby the Collector, Additional Collector and other State Government officials have been excluded from the definition of Tax Recovery Officer, the old rule 19A relating to entrustment of certain functions by the Tax Recovery Officer to officers of lower rank have been substituted by a new rule 19A, which contains amended provisions consequent to the aforesaid amended definition of Tax Recovery Officer. (iv) Under the provisions of sub-rule (1) of rule 59, where the sale of a property, for which a reserve price has been specified, has been postponed for want of a bid of an amount equal to or greater than the reserve price, the Income-tax Officer, if so authorised by the Commissioner in this behalf, can bid for the property on behalf of the Central Government at any subsequent sale. However, rule 57 requires the purchaser to deposit immediately after the declaration of sale to him, 25 per cent. of the amount of the purchase money with the officer conducting the sale and to pay the balance amount to the Tax Recovery Officer within 15 days of the sale. This requirement of rule 57, apart from being unnecessary where the Department is the successful bidder, is an impediment to the bidding by the Income-tax Officer. To overcome this difficulty, a new sub-rule (3) has been inserted in rule 59 to provide that where the Income-tax Officer is declared a purchaser of a property at any subsequent sale, the provisions of rule 57 shall not apply to the case and the amount of the purchase price shall be adjusted towards the outstanding amount specified in the recovery certificate. (v) Under the provisions of rule 61, the Income-tax Officer can also apply to the Tax Recovery Officer for setting aside, under certain circumstances, the sale of immovable property in execution of a certificate, if his interests are affected by such sale. Amendments have been made to this rule to provide that such action under the rule can be taken by an Income-tax Officer only if he is authorised by the Chief Commissioner or Commissioner in this behalf. (vi) Pursuant to the abolishing of the posts of " Tax Recovery Commissioners " and Tax Recovery Officers now working under the administrative control of the Chief Commissioner or Commissioner, consequential amendments have been made to rules 82, 83, 87 and 92. (vii) Pursuant to the abolishing of the posts of " Tax Recovery Commissioners " and omission of sub-section (43B) of section 2 containing the definition " Tax Recovery Commissioner " and also pursuant to the amendments to sub-section (44) of section 2 containing the definition " Tax Recovery Officer " whereby the Collector. Additional Collector and other State Government Officials have been excluded from the definition of Tax Recovery Officer, consequential amendments have been carried out in rule 86 relating to appeals against the orders of the Tax Recovery Officer. (viii) A new rule 94 has been inserted in the Second Schedule to provide for continuance of all pending proceedings under this Schedule before the coming into force of the amendments to the Schedule by the Amending Act, 1987, from the stage they had reached. The rule also provides that every recovery certificate issued by the Income-tax Officer under section 222 before such amendment, shall be deemed to be a certificate drawn up by the Tax Recovery Officer under that section after such amendment. The rule further empowers the Board to issue general or special order for the purposes of removing any difficulty regarding the continuity of the pending recovery proceedings. 12. 22 Amendments to the Second Schedule by the Amending Act, 1989. --The Amending Act, 1989, has further amended the Second Schedule to the Income-tax Act and also the provisions of the Amending Act, 1987, to secure that the words " Income-tax Officer " occurring in the Second Schedule, as it stood immediately before its amendment by the Amending Act, 1987, are substituted by the words " Assessing Officer " retrospectively with effect from 1-4-1988. This was to enable the Assessing Officers (including Assistant Commissioners and Deputy Commissioners) to continue to take actions envisaged in the old provisions of the Second Schedule during the period 1-4-1988 to 31-3-1989. The Amending Act, 1989, has, however, further secured that other amendments to the Second Schedule made by the Amending Act, 1987, shall take effect from 1-4-1989 only. 12.23 Amendments to the Third Schedule by the Amending Act, 1987, and the Amending Act, 1989.--The Third Schedule to the Income-tax Act lays down the procedure for distraint and sale of movable property where outstanding dues are to be recovered from the assessee by this method under the provisions of section 226(5) of the Income-tax Act. Since action under the old provisions of section 226(5) could be taken only by the Income-tax Officer, the old provisions of the Third Schedule referred to an Income-tax Officer only. However, since under the amended provisions of section 226(5), action envisaged in that section can now be taken by the Assessing Officer as well as by the Tax Recovery Officer, the Amending Act, 1987, has amended the Third Schedule to substitute the reference therein to " Income-tax Officer " by a reference to the " Assessing Officer or Tax Recovery Officer". 12.24 The Amending Act, 1989, has further amended the said Third Schedule and also the provisions of the Amending Act, 1987, to secure that the words " Income-tax Officer " occurring in the Third Schedule, as it stood immediately before its amendment by the Amending Act, 1987, are substituted by the words " Assessing Officer " retrospectively with effect from 1-4-1988. This was to enable the Assessing Officer (including Assistant Commissioners and Deputy Commissioners) to continue to take action envisaged in the old provisions of the Third Schedule during the period 1-4-1988 to 31-3-1989. The Amending Act, 1989, has, however, further secured that with effect from 1-4-1989, the words " Assessing Officer " in the Third Schedule are substituted by the words " Assessing Officer or Tax Recovery Officer " so that the amendments made by the Amending Act, 1987, in this respect are restored. 12.25 These amendments [except amendments to section 2(44) mentioned in para 12.4, certain amendments to sections 222, 223, 224, 225, 226, 228 and 228A mentioned in para 12.15 and certain amendments to the Second and Third Schedules mentioned in paras 12.22 and 12.24 which come into effect from 1-4-1988] come into force with effect from 1st April, 1989. [Clauses (q) and (r) of section 3, sections 85 to 93, 124 and clause (28) of section 126 of the Amending Act, 1987]. [Sections 36, 37, 54, 55, sub-clause (2) of clause (a) and clause (l), (n) and (o) of section 95 of the Amending Act, 1989]. REFUNDS 13.1 Amendments of the provisions relating to refund on appeal or any other proceeding under the Act (section 240).--Section 240 of the Income-tax Act provides that where refund of any amount becomes due to the assessee as a result of any order passed in appeal or other proceeding under the Act, the Assessing Officer shall refund the amount to the assessee suo motu, i.e., without the assessee having to make any claim in this behalf. Under the old provisions of this section, where an assessment was set aside or cancelled by the appellate or revisionary authority with the direction of making a fresh assessment, the assessee became entitled to obtain the refund of the amount of tax already paid over and above the tax on returned income. Therefore, if the assessee made a claim for refund in such circumstances he could not be asked to wait till the fresh assessment order was passed. On the other hand, granting of such refund created difficulty, because, in many cases, with the passage of time it became very difficult to recover the additional demand created on fresh assessment. Further, where additional demand was created on fresh assessment, after refund of tax on setting aside of the original assessment had already been granted, the Department lost interest due to it on the amount of the additional demand created, for the intervening period (i.e., period between the issue of refund to the assessee and completion of fresh assessment). The remove this difficulty, the Amending Act, 1987, has inserted a proviso in the said section 240 to provide that where the assessment is set aside or cancelled with the direction to make an order of fresh assessment, any refund shall become due only on the making of a fresh assessment. 13.2 Further, where the assessment had been annulled in appeal, say for want of jurisdiction or for any other technical reason, and such annulment became final, the judicial pronouncement did not permit retention of even the tax due on the basis of the returned income. Several High Courts had held that in such a case even the tax paid by way of tax deducted at source or advance tax and the tax which was due on the basis of the returned income had to be refunded to the assessee. Equity demanded that even where an assessment was annulled for any reason, the liability of the assessee, at least to the extent of tax payable on the basis of the income declared in the return, should remain. To overcome this difficulty and to make the position clear, the proviso to section 240, inserted by the Amending Act, 1987, provides that where the assessment is annulled, the refund shall become due only in respect of the amount, if any, paid in excess of the tax chargeable on the total income returned by the assessee. 1.3.3 These amendments come into force with effect from 1st April, 1989. [Section 95 of the Amending Act, 1987] APPEALS 14.1 Substitution of a new section 246 by the Amending Act, 1987, and further amendments therein by the Amending Act, 1989.--Under the old provisions of section 246, various orders passed under the Income-tax Act were enumerated against which assessees could file appeal before the Appellate Assistant Commissioner or the Commissioner (Appeals). Since the Amending Act, 1987, inserted several new provisions under the Income-tax Act, including the new scheme of assessment of firm and partners, omitted certain old provisions and also changed the designations of various income-tax authorities, the said section 246 was required to be overhauled. The Amending Act, 1987, has, therefore, substituted a new section 246 in the Income-tax Act. The Amending Act, 1989, has further made amendments in the said new section 246 to set right certain anomalies and remove omissions and also to reverse the changes incorporated therein pursuant to the new scheme of assessment of firm and partners, as the said new scheme itself was withdrawn by the Amending Act, 1989. The provisions of the old section 246 and the new section 246, as it has emerged after amendments by the Amending Act, 1987, and the Amending Act, 1989, are discussed in the following paras. 14.2 The old sub-section (1) of the section consisted of clauses (b) to (o), which specified various orders of an Income-tax Officer against which the assessee could appeal to the Appellate Assistant Commissioner. The new sub-section (1) now consists of clauses (a) to (l) and specifies the orders of an Assessing Officer (other than a Deputy Commissioner against which an assessee may appeal to the Deputy Commissioner (Appeals). The changes effected are : (i) Appeals against orders passed under the following sections/sub-sections of the Income-tax Act have been omitted consequent to the omission of the said sections/sub-sections from the Act :--- (1) An order imposing fine under section 131(2). (2) An order under section 146 refusing to reopen an ex parte assessment under section 144. (3) An order imposing a penalty under section 140A. (4) An order imposing a penalty under section 270. (ii) Appeals, which, under the old provisions, were allowed to be filed against orders of charge of interest under section 216 or against orders of penalties passed under sections 272, 272B and 273, are now allowed only in respect of orders passed under these sections for the assessment year 1988-89 or any earlier assessment years consequent upon the omission of these sections or the barring of the applicability of these sections after the assessment year 1988-89. (iii) Appeals are now provided against orders levying penalties under sections 271B and 272A [for which there were earlier no appeals under sub-section (1)] order levying penalty under section 272AA (for which there was no appeal earlier) and orders levying penalties under sections 271C, 271D and 271E (which have been newly inserted by the Amending Act, 1987). 14.3. The old sub-section (2) of the section consisted of clauses (a) to (d) and (f) to (i), which specified various orders against which an assessee could appeal to the Commissioner (Appeals). The new sub-section (2) also provides for appeals to the Commissioner (Appeals) but consists of clauses (a) to (h). The changes effected are : (i) Appeals against orders passed under the following sections/sub-sections of the Income-tax Act, have been omitted consequent upon the omission of the said sections/sub-sections of the Act :- (1) An order made by the Deputy Commissioner imposing fine under section 131(2). (2) An assessment order made on the basis of the directions issued by the Deputy Commissioner under section 144B. (3) An order imposing a penalty under section 271(1)(c) with the previous approval of the Deputy Commissioner under the proviso to section 271(1)(iii). (ii) Appeal is now provided against an order made by the Deputy Commissioner levying penalty under section 272AA, for which there was no appeal earlier. (iii) Appeal is now provided under this sub-section against an order imposing penalty under Chapter XXI by the Income-tax Officer or the Assistant Commissioner with the prior approval of the Deputy Commissioner under the provisions of sub-section (2) of section 274. 14.4 The old sub-sections (3) and (4), which dealt with pending appeals before the Appellate Assistant Commissioner before the " appointed day " when the institution of Commissioner (Appeals) came into existence with effect from 10th July, 1978, having become redundant, do not find place in the new section 246, However, the old sub-section (5), which empowered the Board to transfer any pending appeal from the Appellate Assistant Commissioner to the Commissioner (Appeals) under certain circumstances has been retained as sub- section (3) of the new section 246 with the following changes :--- (1) Now the appeals can also be transferred by the Director General, Chief Commissioner or Commissioner, if so authorised by the Board. (2) The appeals are to be transferred from the Deputy Commissioner (Appeals) to the Commissioner (Appeals) instead of from the Appellate Assistant Commissioner to the Commissioner (Appeals). This is consequential to the changes in designations. 14.5 Amendment of the sub-heading ' A ' of Chapter XX relating to appeals and revisions. --The old sub-heading ' A ' of Chapter XX read as under : "Appeals to the Appellate Assistant Commissioner and Commissioner (Appeals)". As a result of amendments made to the sub-heading, first by the Amending Act, 1987, and then by the Amending Act, 1989, the said subheading ' A ' now reads as under : "Appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals)". 14.6 Insertion of new section 246A by the Amending Act, 1987, and its omission by the Amending Act, 1989.--A new section 246A was inserted by the Amending Act, 1987, which provided for filing of applications by the assessees before the Deputy Commissioner (Appeals) or the Commissioner (Appeals), after submission of returns, for advance decision on any issue in certain cases even before the assessment had been completed. This was in consequence of the charge of additional income-tax under a new section 158B, which was also inserted by the Amending Act, 1987. Since, following representations in this regard, the new section 158B has been omitted by the Amending Act, 1989, section 246A has also been omitted by the said Amending Act, 1989. 14.7 These amendments come into force with effect from 1st April, 1989. [Section 99 of the Amending Act, 1987.] [Sections 42 to 44 of the Amending Act, 1989.] MODES OF TAKING OR ACCEPTING CERTAIN LOANS AND DEPOSITS AND REPAYMENT OF CERTAIN DEPOSITS 15.1 Amendments of the provisions which require the taking or accepting of a loan or deposit by an account payee cheque or account payee bank draft (section 269SS). --Under the old provisions of section 269SS, no person could take or accept from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loans or deposits was Rs. 10,000 or more. The provisions of this section caused hardships in the cases of agriculturists while carrying out transactions among themselves. The provisions of section 269SS are meant to prevent tax evasion. However, where agriculturists do not have any other income except income from agriculture, which is not liable to income-tax, there is no purpose of applying the provisions of section 269SS to them. Further, the monetary limit of Rs. 10,000, which was fixed long back, was found to be causing hardship in the case of small genuine transactions. 15.2 To remove the above hardships, the Amending Act, 1987, has amended section 269SS to make the following changes :--- (i) The monetary limit for the application of the provisions of the section has been increased from Rs. 10,000 to Rs. 20,000. (ii) It has been provided that the provisions of this section shall not apply to any loan or deposit where both the persons involved in the transaction, i.e., the giver and the taker derive income only from agriculture and neither of them has any income chargeable to tax under the Act. 15.3 Amendments of the provisions which require the repayment of certain deposits by an account payee cheque or account payee bank draft [section 269T(2)].---Under the old provisions of sub-section (2) of section 269T, no company (including banks), co-operative society or firm could repay any deposit made with it otherwise than by an account payee cheque or account payee bank draft in the name of the person who had made the deposit, if the amount of the deposit or the aggregate amount of the deposits together with interest was Rs. 10,000 or more. A deposit was defined to mean any deposit of money which is repayable after notice or is repayable after a period. The provisions of section 269T were being circumvented in the following ways : (i) The provisions had limited applicability, as the same applied to banks, companies, co-operative societies and firms. This meant that individuals, Hindu undivided families, association of persons, etc., were not covered by these provisions. (ii) The limited meaning given to the term deposit had been instrumental in the circumvention of the provisions by many, " Shroff bankers" and money-lenders, who maintained running accounts of the nature of current account and claimed non-applicability of the provisions of section 269T on the plea that the amount credited in such accounts of the customers were payable on demand and were not deposits. This problem did not arise in the case of companies, because they were prohibited by the Companies (Acceptance of Deposits) Rules, 1975, from accepting any deposits which are repayable on demand or on notice, except where such deposit is repayable after a minimum period of six months. All other entities like firms, individuals, association of persons, etc., could, however, help circumvent the provisions of this section. Further, the monetary limit of Rs. 10,000, having been fixed long back, was causing hardship in the case of small genuine transactions. 15.4 To remove the hardship pointed out above and also to prevent the circumvention of the provisions of the section, the Amending Act, 1987, has made the following amendments to sub-section (2) of section 269T : (i) The monetary limit for the application of the provisions of the said sub-section (2) has been increased from Rs, 10,000 to Rs. 20,000. (ii) The scope of the sub-section is extended by inserting the words " or other person " after the word " firm ", so that the provisions of the sub-section are now applicable to all persons. (iii) The definition of the term ' deposit ' has been amended. For the purposes of the section, the term ' deposit ' now means any deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company includes deposit of any nature. 15.5 These amendments come into force with effect from 1st April, 1989, and will, accordingly, apply in relation to the transactions entered into after this date. [Sections 103 and 104 of the Amending Act, 1987.] PENALTIES IMPOSABLE 16.1 The Amending Act, 1987, has made several amendments in the provisions relating to imposition of penalties contained in various sections of Chapter XXI of the Income-tax Act. The main features of the amendments are (i) As far as possible, imposition of penalties and the quantum thereof has been delinked with the completion of assessment and the assessed tax, so that the penalties can be imposed immediately on the occurrence of the default without waiting for the finalisation of the assessment. This has also become necessary in view of the new procedure of assessment under which assessment orders will not be passed in a majority of cases. (ii) Penalties leviable for default in filing the return of income or for default in complying with the provisions relating to payment of advance tax have been omitted consequent upon the charging of mandatory interest for these defaults under the provisions of the new sections 234A and 234B. (iii) New penalty provisions have been introduced to provide for imposition of penalties for failure to deduct tax at source and for failure to comply with the provisions of sections 269SS and 269T. (iv) As far as possible, provisions for imposition of penalties for defaults of miscellaneous nature, which were contained in different sections of the Act have been consolidated at one place in a single section. (v) The period of limitation for imposition of penalties has been substantially reduced. The amendments made to various sections relating to imposition of penalties are discussed in detail in the following paras. 16.2 Omission of sections 270, 272 and 272B consequent upon the incorporation of the provisions thereof in a new section 272A. --The Amending Act, 1987, has omitted the following sections of Chapter XXI of the Income-tax Act, consequent upon the incorporation of the provisions of these sections in the new section 272A :--- (i) Section 270 relating to penalty for failure to furnish information regarding securities, etc. (ii) Section 272 relating to penalty for failure to give notice of discontinuance of business or profession. (iii) Section 272B relating to penalty for failure to comply with the provisions of section 139A. 16.3 Amendments to section 271 by the Amending Act, 1987, and the Amending Act, 1989. --Under the old provisions of section 271 of the Income-tax Act, penalties were leviable for defaults in furnishing return of income, failure to comply with notices issued under section 142(1) or 143(2) or a direction issued under section 142(2A) and for concealment of income. The Amending Act, 1987, however, substituted a new section 271 in the Income-tax Act, which levied penalties only for failure to comply with notices or direction issued under sections 142(1), 142(2A) or 143(2). Levy of penalty for default in furnishing the return of income was omitted, because it was replaced by the charge of mandatory interest under a now section 234A. Levy of penalty for concealment of income was omitted, as it was replaced by the charge of mandatory additional income-tax at the rate of 30 per cent. of income under a new section 158B, which was also inserted by the Amending Act, 1987. However, following representations in this behalf, the Amending Act, 1989, has withdrawn the charge of mandatory additional income-tax by omitting the new section 158B inserted by the Amending Act, 1987 (refer to item 3 of the Table given in para 2.6 ante.). The Amending Act, 1989, has, therefore, amended the provisions of the Amending Act, 1987, and section 271 of the Income-tax Act to secure that the provisions regarding levy of penalty for concealment of income are again brought back in the said section 271. The combined effect of the amendments made by the Amending Act, 1987, and the Amending Act, 1989, in section 271 is that the following changes have been effected in the provisions of this section :--- (i) Provisions for levy of penalty for default in furnishing the return of income have been omitted, as these have been replaced by provisions for charge of mandatory interest under a new section 234A. However, provisions for levy of penalty for default in furnishing the return of income under section 139(4A) in the case of religious or charitable trusts have been incorporated in the new section 272A. (ii) The new provisions for levy of penalty for failure to comply with notices/direction issued under sections 142(1), 142(2A) and 143(2) provide for a minimum penalty of Rs. 1,000 and maximum penalty of Rs. 25,000 for each default. Under the old provisions, penalty was computed with reference to the amount of tax which would have been avoided if the returned income had been accepted as the correct income. (iii) The quantum of penalty for concealment of income or furnishing inaccurate particulars of income has been increased from "twice" to "three times" the tax sought to be evaded. (iv) A new Explanation VI has been inserted in sub-section (1) of the section to provide that penalty for concealment of income shall not be imposed on that portion of income which is enhanced as a result of adjustments made under section 143(1)(a) and on which additional income-tax has been charged under section 143(1A). (v) A new sub-section (5) has been inserted in the section to provide for a transitory provision, namely, that penalties for the assessment year 1988-89 and earlier assessment years shall be levied in accordance with the provisions of section 271, as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989). 16.4. Amendments to section 271A relating to penalty for failure to keep, maintain or retain books of account, documents, etc. Section 271A levies penalty for failure to keep, maintain or retain books of account or documents as required by section 44AA of the Income-tax Act or the rules made thereunder. Under the old provisions of the section, the penalty was computed with reference to the tax which would have been avoided if the returned income had been accepted as the correct income. The Amending Act, 1987, has amended the said section 271A to provide for a minimum penalty of Rs. 2,000 and a maximum penalty of Rs. 1,00,000, thus delinking the levy of penalty with the completion of assessment. 16.5. Insertion of a new section 271C to provide for levy of Penalty for failure to deduct tax at source.--Under the old provisions of Chapter XXI of the Income-tax Act, no penalty was provided for failure to deduct tax at source. This default, however, attracted prosecution under the provisions of section 276B, which prescribed punishment for failure to deduct tax at source or after deducting, failure to pay the same to the Government. It was decided that the first part of the default, i.e, failure to deduct tax at source should be made liable to levy of penalty, while the second part of the default, i.e., failure to pay the tax deducted at source to the Government, which is a more serious offence, should continue to attract prosecution. The Amending Act, 1987, has accordingly inserted a new section 271C to provide for imposition of penalty on any person who fails to deduct tax at source as required under the provisions of Chapter XVIIB of the Act. The penalty is of a sum equal to the amount of tax which should have been deducted at source. 16.6 Insertion of new sections 271D and 271E to provide for levy of penalties for failure to comply with the provisions of sections 269SS and 269T. --Under the old provisions of Chapter XXI of the Income-tax Act, no penalties were prescribed for failure to comply with the provisions of sections 269SS and 269T, which require the taking or accepting of certain loans or deposits or repayment of certain deposits by account payee cheques or account payee bank drafts if the amount of the deposit or loan is Rs. 20,000 or more. These defaults, however, attracted prosecution under the provisions of sections 276DD and 276E. It was decided that such defaults should, instead of attracting prosecution, be made liable to penalties. The Amending Act, 1987, has, therefore, omitted the said sections 276DD and 276E from the Income-tax Act and has inserted two new sections 271D and 271E to provide for penalties for these defaults. The amount of penalty is a sum equal to the amount of loan or deposit taken or deposit repaid in contravention of the provisions of sections 269SS or 269T. 16.7. Substitution of a new section 272A to provide for levy of penalties for miscellaneous defaults.--Under the old provisions of section 272A of the Income-tax Act, penalties were provided for various defaults of miscellaneous nature. Some penalties for defaults of miscellaneous nature were also provided for in certain other sections of the Act. The Amending Act, 1987, has substituted a new section 272A, which contains provisions for levy of penalties for defaults of miscellaneous nature, which were earlier mentioned in the old section 272A as well as various other sections of the Act, and which have now been consolidated in the said new section 272A. 16.8 Various penalties leviable under the new section 272A fall under two categories. The first category is dealt with in various clauses of sub-section (1) of the section, where minimum and maximum penalties are provided for each default, while the second category, where the default is of continuing nature is dealt with in various clauses of sub-section (2) of the section where minimum and maximum penalties are provided for every day during which the default continues. A chart showing the nature of defaults and sub-sections and clauses of the new section 272A under which these defaults are covered is given below. The chart also shows the sub-sections and clauses of the old section 272A or other sections of the Act, under which the same defaults were covered earlier. Sl. No. Nature of default Sub-section and clause of new section 272A Sub-section and clause of old section 272A or other old sections of the Act which covered the default 1 2 3 4 1 Refusal by a person to answer certain questions put to him by any income-tax authority, when legally bound to state the truth of any matter concerning his assessment. (1)(a) (1)(a) 2 Refusal to sign any statement made in the course of any proceedings under the Act. (1)(b) (1)(b) 3. Non-compliance with summons issued under section 131(1) either to attend to give evidence or produce books of account or other documents at a certain place and time. (1)(c) Old section 131(2) 4. Failure to comply with the provisions of section 139A relating to allotment of permanent account number. (1)(d) Old section 272B 5. Failure to comply with a notice issued under section 94(6) requiring particulars of certain securities, etc., held by a person. (2)(a) Old section 270 6. Failure to give notice of discontinuance of business or profession, as required under section 176(3). (2)(b) Old section 272. 7. Failure to furnish in due time any of the returns, statements or particulars mentioned in sections 133, 206, 206A, 206B, or 285B. (2)(c) 2(a) 8. Failure to allow inspection of any register referred to in section 134 or to allow copies thereof to be taken. (2)(d) (2)(b) 9. Failure to furnish or furnish within time return of income under section 139(4A) in the case of religious or charitable trusts. (2)(e) Old section 271(1)(i)(a) 10. Failure to deliver in due time to the Commissioner copy of declaration filed by the payee under section 197A. (2)(f) (2)(ba) 11. Failure to furnish certificate of tax deducted at source, as required by section 203. (2)(g) (2)(c) 12. Failure to deduct arrears of tax from salary and pay to the Central Government in accordance with the order of the Assessing Officer or the Tax Recovery Officer under section 226(2).s (2)(h) (2)(d) * NOTE : Penalties for failure to furnish in due time the prescribed returns mentioned in sections 206A and 206B, which are to be filed by a person, who pays interest or dividends without deducting tax therefrom, were not leviable under the old provisions of section 272A or under any other sections of the Income-tax Act. These have been newly included in the provisions of section 272A. 16.9 The penalty leviable in respect of defaults covered by sub-section (1) of section 272A (mentioned at serial Nos. 1 to 4 in the above chart) is a minimum of Rs. 500 extending up to the maximum of Rs. 10,000 for each default. The penalty leviable in respect of failures covered by sub-section (2) of section 272A (mentioned at serial Nos. 5 to 12 in the above chart) is a minimum of Rs. 100 extending up to the maximum of Rs. 200 for every day during which the failure continues. 16.10 Sub-section (3) of the new section 272A specifies the authorities by whom the penalties under the section can be imposed. Penalty for failure covered by clause (f) of sub-section (2) [mentioned at serial No. 10 in the above chart] can be levied only by the Chief Commissioner or by the Commissioner. All other penalties under these sections are to be imposed by income-tax authorities not lower in rank than a Deputy Director or a Deputy Commissioner. 16.11. Sub-section (4) of the new section 272A incorporates the old provisions requiring that, before imposing penalty under the section, the person concerned should be given an opportunity of being heard in the matter. 16.12 Amendment to section 273 to bar its applicability after the assessment year 1988-89.--The penalties imposable under section 273 for defaults in complying with the provisions relating to payment of advance tax have been replaced by the charge of mandatory interest under a new section 234B inserted in the Income-tax Act by the Amending Act, 1987. The provisions of the new section 234B are applicable from the assessment year 1989-90 onwards. Consequently, the Amending Act, 1987, has inserted a new sub-section (3) in section 273 to provide that the provisions of this section would apply only up to the assessment year 1988-89. 16.13 Amendments to section 273A by the Amending Act, 1987, and the Amending Act, 1989.--Under the old provisions of sub-section (1) of section 273A of the Income-tax Act, the Commissioner was empowered to reduce or waive the following penalties and interest : (i) Penalty under section 271(1)(i) for failure to furnish the return of income under section 139(1). (ii) Penalty under section 271(1)(iii) for concealment of income or furnishing inaccurate particulars of income. (iii) Penalty under section 273 for not complying with the provisions relating to payment of advance tax. (iv) Interest under section 139(8) for late filing or non-filing of return of income. (v) Interest under sections 215 and 217 for filing wrong estimates or for not filing estimates for payment of advance tax. 16.14 The provisions regarding levy of penalties and charge of interest for defaults in filing returns of income or in complying with the provisions regarding payment of advance tax have been omitted and replaced by charge of mandatory interest under the new sections 234A and 234B inserted by the Amending Act, 1987, which are applicable from the assessment year 1989-90. Consequently, the provisions of section 273A have also been amended by the Amending Act, 1987, and again by the Amending Act, 1989. The combined effect of the amendments made to section 273A by the two Amending Acts, is indicated below. (i) Under the amended sub-section (1) of section 273A, only the penalty leviable under section 271(1)(iii) for concealment of income or furnishing inaccurate particulars of income [mentioned at serial No. (ii) in the preceding para] can be reduced or waived. The amended sub-section (1) does not now cover penalty and interest mentioned at serial Nos. (i) and (iii) to (v) mentioned in the preceding para, as these are not leviable under the new provisions. (ii) A new sub-section (6) has been inserted in the section to provide that the provisions of the section, as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989), shall apply up to the assessment year 1988-89. This means that the amended provisions of section 273A would be applicable from the assessment year 1989-90 onwards. 16.15 Amendments to section 273B by the Amending Act, 1987, and the Amending Act, 1989.--Section 273B provides that penalties imposable under certain sections of the Income-tax Act, mentioned therein shall not be imposed if the person or the assessee concerned proves that there was reasonable cause for the default in question. Amendments have been made to this section by the Amending Act, 1987, as well as the Amending Act, 1989, which are consequential to the omission, substitution or insertion of certain sections in Chapter XXI dealing with penalties, discussed in the preceding paras. 16.16 Amendments to the provisions of section 274 relating to procedure for levy of penalties.--Under the old provisions of section 274 of the Income-tax Act, which lays down the procedure for levy of penalties, approval of any higher authority was not necessary for this purpose. The Amending Act, 1987, has amended the provisions of this section by inserting sub-section (2), which provides that the prior approval of the Deputy Commissioner should be obtained, if-- (i) the penalty is to be imposed by the Income -tax Officer and it exceeds Rs. 10,000 ; (ii) the penalty is to be imposed by the Assistant Commissioner and it exceeds Rs. 20,000. 16.17 Under the old provisions of sub-section (3) of section 274, it was provided that where the penalty was imposed by the Appellate Assistant Commissioner or the Commissioner (Appeals), they should forthwith send a copy of the penalty order to the Income-tax Officer. In order to rationalise these provisions and also to make changes consequential to the new designation of income-tax authorities, the Amending Act, 1987, has substituted a new sub-section (3) in the section, which provides that where the penalty is imposed by an income-tax authority, which is not himself the Assessing Officer, he shall forthwith send a copy of the penalty order to the Assessing Officer. 16.18 Amendments to section 275 by the Amending Act, 1987, and the Amending Act, 1989.--Under the old provisions of section 275 of the Income-tax Act, an order imposing a penalty under Chapter XXI of the Act could be passed within two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty had been initiated, were completed. Where, however, the relevant assessment or other order was the subject-matter of appeal by the assessee to the Deputy Commissioner (Appeals) or Commissioner (Appeals) or was the subject-matter of appeal by the Department to the Appellate Tribunal, the penalty order could be passed within the aforesaid period of two years or within six months from the end of the month in which the order of the appellate authority was received by the Commissioner, whichever period expired later. Thus, under the old provisions, penalty proceedings were completed long after the completion of assessment proceedings during which penalty proceedings had been initiated. It was felt that levy of penalty can have the requisite deterrent effect only when the penalty proceedings are disposed of expeditiously. Further, although under the old provisions, the limitation was extended where the assessment order, etc., were the subject-matter of appeals, it was not extended where the assessment order was the subject-matter of revision by the Chief Commissioner or Commissioner under section 263. This was a lacuna in the Act. 16.19 In order to achieve quicker disposal of penalty proceedings and also to remove the lacuna pointed out above, the Amending Act, 1987, has amended section 275 to provide for substantially reduced limitation period for disposal of penalty proceedings. Under the amended provisions of section 275, no order imposing a penalty can be passed-- (i) in a case where the relevant assessment order or other order is the subject-matter of appeal by the assessee to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) or by the Department to the Appellate Tribunal, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed or six months from the end of the month in which the order of the appellate authority is received by the Chief Commissioner or Commissioner, whichever period expires later ; (ii) in a case where the relevant assessment order or other order is the subject-matter of revision under section 263, after the expiry of six months from the end of the month in which such order of revision is passed ; (iii) in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated are completed or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later. 16.20 The Amending Act, 1989, has further amended clause (a) of section 275, which was substituted by the Amending Act, 1987, to set right a drafting error therein. 16.21 These amendments come into force with effect from 1st April, 1989. However, in respect of amendment of section 275, which has reduced the limitation period for imposition of penalties (refer to para 16.19 ante.), it was clarified by the issue of an Income-tax (Removal and Difficulties) Order, 1989, vide No. G. S. R. 376(E), dated 23-3-1989 (See [1989] 176 ITR (St.) 322) (refer to paras 11.2 and 11.3 of Part I of these Explanatory Notes) that the provisions of section 275, as they stood before the commencement of the Amending Act, 1987, shall apply in respect of any action for imposition of penalty initiated on or before the 31st day of March, 1989. It follows, therefore, that the reduced limitation period for imposition of penalties under the amended provisions of section 275 would apply to penalty proceedings initiated from 1st April, 1989 onwards. NOTE : This clarificatory amendment has subsequently been incorporated in section 275 itself by the Direct Tax Laws (Second Amendment) Act, 1989, which received the assent of the President on 20-10-1989, as Act No. 36 of 1989 (See [1989] 180 ITR (St.) 45). [Sections 105 to 116 of the Amending Act, 1987]. [Sections 50 to 52, clause (4) of section 57 and clause (m) of section 95 of the Amending Act, 1989]. OFFENCES AND PROSECUTIONS 17.1 Insertion of new section 276 to provide punishment for certain fraudulent actions to thwart tax recovery.--The Amending Act, 1987, has inserted a new section 276 in the Income-tax Act, which provides punishment for fraudulent removal, concealment, transfer or delivery of property or any interest therein, intending thereby to prevent the property or interest therein from being taken in execution of a certificate under the provisions of the Second Schedule relating to procedure for recovery of tax. The punishment provided is rigorous imprisonment for a term which may exceed to two years and also fine. The provisions of this section are in substitution for the provisions of rule 89 of the Second Schedule, which has been omitted by the Amending Act, 1987 (refer to para 12.21 ante.) 17.2 Substitution of a new section for section 276B to exclude failure to deduct tax at source from prosecution provisions and to provide prosecution only for failure to pay tax deducted at source to the Government.--Under the old provisions of section 276B, the following defaults were liable to prosecution :-- (i) failure to deduct tax at source under the provisions of Chapter XVIIB. (ii) failure to pay to the Government the tax so deducted at source. The punishment provided was :-- (i) where the amount involved exceeded Rs. 1 lakh, rigorous imprisonment ranging from a minimum period of six months to the maximum period of seven years and fine. (ii) where the amount involved did not exceed Rs. 1 lakh, rigorous imprisonment ranging from a minimum period of three months to the maximum period of three years and fine. Failure to deduct tax or to pay the tax so deducted under the provisions of section 80E(9) was also liable to the same punishments as indicated above. 17.3 It was decided that the default indicated at serial No. (i) above, i.e., failure to deduct tax at source should only attract levy of penalty, while the default indicated at serial No. (ii) above, i.e., failure to pay the tax deducted at source to the Government should continue to attract prosecution. Further, since section 80E has been omitted by the Amending Act, 1987, reference to the said section in section 276B is no longer necessary. Further, it was also decided that the extent of punishment should not depend upon the amount of tax involved, but should be within a uniform range, leaving the discretion to the court to award punishment according to the gravity of the offence. 17.4 To achieve the above objectives, the Amending Act, 1987, has substituted a new section 276B in the Income-tax Act, to provide prosecution only for failure to pay to the Government the tax deducted at source by a person under the provisions of Chapter XVIIB. A uniform punishment has been provided for the offence, which is rigorous imprisonment for at least three months, extending up to seven years and fine. NOTE : Failure to deduct tax at source now attracts penalty under a new section 271C (refer to para 16.5 ante.). 17.5 Omission of sections 276DD and 276E.--The Amending Act, 1987, has omitted sections 276DD and 276E, which provided prosecution for contravention of the provisions of sections 276SS and 269T, as these defaults would now attract penalties under the newly inserted sections 271D and 271E (refer to para 16.6 ante.). 17.6 Consequential amendment to section 278AA.--Section 278AA provides that where a person proves that there was a reasonable cause for the failure, the punishment for defaults covered under the sections mentioned in the said section 278AA need not be imposed. Consequent upon the omission of sections 276DD and 276E, the Amending Act, 1987, has omitted references to these sections from the said section 278AA. 17.7 These amendments come into force with effect from 1st April, 1989. [Sections 117 to 120 of the Amending Act, 1987]. MISCELLANEOUS PROVISIONS 18.1 Insertion of a new section 293B to empower the Central Government or Board to condone delays in obtaining approval.--Under the provisions of section 119(2)(b) of the Income-tax Act, the Board is empowered to authorise any income-tax authority [except a Deputy Commissioner (Appeals) or a Commissioner (Appeals)] to admit belated applications or claims for any exemption, deduction, refund or any other relief under the Act and deal with them on merits in accordance with law. However, the Board had no such power to waive the time-limit where the application had to be made to itself within a specified time. There are several provisions in the Act under which the Central Government or the Board is required to give its approval to agreements, contracts of service, etc., for the purposes of certain tax benefits, if the applications for such approvals are made within the specified time. It was felt that the Central Government and the Board should also have powers, on the analogy of the provisions of section 119(2)(b) to condone the delay in making an application to them for approval under various provisions of the Act. The Amending Act, 1987, has, therefore, inserted a new section 293B in the Income-tax Act, which empowers the Central Government or the Board to condone, for sufficient cause, any delay in obtaining the approval of the Central Government or the Board where such approval is required to be obtained before a specified date under any provisions of the Act. 18.2 This amendment comes into force with effect from 1st April, 1989. [Section 121 of the Amending Act, 1987]. CONSEQUENTIAL AMENDMENTS 19.1 The Amending Act, 1987, has also carried out certain amendments of consequential nature in various sections of the Income-tax Act. Section 126 of the Amending Act, 1987, which has carried out the said consequential amendments, originally contained clauses (1) to (28). Out of these, clauses (5), (8), (11), (13), (23) and (28) have been omitted by the Amending Act, 1989. Thus, only 22 effective clauses are left in the said section 126 of the Amending Act, 1987. 19.2 Clauses (1) and (25) of the said section 126 of the Amending Act, 1987, have carried out consequential amendments to section 2 and 279 respectively of the Income-tax Act. These amendments have come into force with effect from 1st April, 1988, and have already been referred to in Part I of these Explanatory Notes. 19.3 The other clauses of the said section 126 of the Amending Act, 1987, have carried out consequential amendments to various other sections of the Income-tax Act. These amendments have come into force with effect from 1st April, 1989. The clauses of section 126 of the Amending Act, 1987, which have carried out the consequential amendments and sections of the Income-tax Act, which have been so amended, are indicated in the following chart :-- Sl. No. Clause of section 126 of the Amending Act, 1987, which has carried out consequential amendment Section of the I. T. Act, which has been amended 1. 2 3 1. (2) 10(15)(iiia) 2. (3) 10A 3. (4) 29 4. (6) 40A(2)(a) 5. (7) 41 6. (9) 44 7. (10) 80 8. (12) 80HHA 9. (14) 132B(1)(iii) 10. (15) 133A(6) 11. (16) 139(8)(b) 12. (17) 144A 13. (18) 174(4) and (6) 14. (19) 176(5) and (7) 15. (20) 199 16. (21) 219 17. (22) 234 (omitted) 18. (24) 276CC 19. (26) 288(4)(b) 20. (27) First Schedule : rule 5(a) Amendments to the Wealth-tax Act, 1957 The Amending Act, 1987, has made amendments to the provisions of the Wealth-tax Act relating to powers of income-tax authorities, assessment of association of persons, collection and recovery of tax, refunds, appeals, penalties and offences and prosecutions, in order to bring these provisions in line with the corresponding provisions of the Income-tax Act, as they have emerged after their amendment by the said Amending Act, 1987, and which have been discussed in the preceding paras in this part of the explanatory notes. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Amending Act, 1989. The Table below shows the provisions of the Wealth-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987, and the Amending Act, 1989, which have carried out the necessary amendments and the subject-matter of the amendments in brief. Sl. No. Section of the Amending Act, 1987/Amending Act, 1989 Section of the Wealth-tax Act that has been amended Corresponding section of the Income-tax Act Subject-matter of the amendment in brief 1 2 3 4 5 1. 128( iv ) of the Amending Act, 1987. 2( h ) (New clause inserted) 2( 17 ) Amendment of the definition of 'company' in the Wealth-tax Act to bring it in line with its definition in the Income-tax Act. 2. 128( v ) of the Amending Act, 1987. 2( lc ) (New clause inserted) 2( 29c ) Insertion of definition of 'maximum marginal rate' in section 2 of the W.T. Act for the purposes of the Act, on the same lines as in the Income-tax Act. *3. (i) 142 of the Amending Act, 1987. (ii) 68, 69 95 ( p ) of the Amending Act, 1989 18 18A 271, 272A(1)( a ) to ( c ) 272A(2) ( c ), 274 275 Amendments of penalty provisions in the Wealth-tax Act to bring them in line with the corresponding provisions in the Income-tax Act. 4. 145 of the Amending Act, 1987. 21AA(1) 167B(1) Amendments to section 21AA(1) relating to assessment when assets are held by association of persons where the individual shares of the members are indeterminate or unknown. 5. (i) 146 of the Amending Act, 1987. (ii) 71 of the Amending Act, 1989. 23 246 Amendments to section 23 relating to appeals to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) from orders of the Assessing Officer 6. 148 of the Amending Act, 1987. 31 220 Amendments to section 31 relating to time for payment of tax, demand and charge of interest for delayed payments. 7. 149(b) of the Amending Act, 1987. 32 221-232, Second and Third Schedules Amendments to section 32 relating to mode of recovery consequent upon the abolition of the post of "Tax Recovery Commissioner". 8. (i) 150(i) of the Amending Act, 1987. (ii) 73(a) of the Amending Act, 1989. 34A(1) 240 Amendments to section 34A(1) relating to refund on appeals, etc 9. 152 of the Amending Act, 1987. 35K 279(1A) (3) Amendments to section 35K relating to bar on prosecution and in- admissibility of evidence under certain circumstances. *10. 153 of the Amending Act, 1987. 37 131 Amendments to section 37 relating to power to take evidence on oath, etc. *11. 154 of the Amending Act, 1987. 37A 132 Amendments to section 37A relating to power of search and seizure. 12. 155 of the Amending Act, 1987. 37B 132A Amendments to section 37B relating to powers to requisition books of account, etc. 13. 156 of the Amending Act, 1987. 37C (New section inserted) 132B A new section 37C relating to application of retained assets inserted in the Wealth-tax Act containing provisions similar to those of section 132B of the Income-tax Act. Earlier, there was no such provision in the Wealth-tax Act. 14. 157 of the Amending Act, 1987. 38 Amendments to section 38 relating to power of wealth-tax authorities to call for information, returns and statements. Amendments to section 38 relating to power of Wealth-tax authorities to call for information, returns and statements. *NOTES : (i) Sections 143 and 147 of the Amending Act, 1987, had introduced now sections 18D and 23A in the Wealth-tax Act, to provide for charging of additional wealth-tax at 3% of wealth and for moving an application by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for deciding an issue before completion of assessment. These new sections have, however, been omitted by the Amending Act, 1989. This has also been discussed in Para 2.6 ante. and items at serial Nos. 6 and 7 in the Table given in that para. (ii) Section 144 of the Amending Act, 1987, had made amendments to section 21A of the Wealth-tax Act, relating to assessment of trusts, which were consequential to the introduction of the new scheme of assessment of charitable trusts, etc. introduced in the Income-tax Act. However, consequent to the withdrawal of the said new scheme, the Amending Act, 1989, has also reversed the amendments made to section 21A of the Wealth-tax Act, thus restoring it back to its original form. (iii) The amendments indicated at serial Nos. 3, 10 and 11 of the above Table, which are star-marked, are further explained in the following paras. 21. Amendments to sections 18 and 18A, relating to penalties under the Wealth-tax Act, by the Amending Act, 1987, and the Amending Act, 1989. --The Amending Act, 1987, had substituted the old sections 18 and 18A of the Wealth-tax Act by new sections. However, the Amending Act, 1989, has restored back the old section 18, but has made certain amendments in that section. Further, the Amending Act, 1989, has retained the new section 18A, as it was introduced by the Amending Act, 1987. The combined effect of the amendments made by the two Amending Acts to these sections is that the penalty provisions under the Wealth-tax Act have been brought, as far as possible, on the same lines as the corresponding provisions in the Income-tax Act. The changes made in sections 18 and 18 A are as follows : (i) Changes made in section 18 (corresponding to sections 271, 274 and 275 of the Income- tax Act), -- (1) Provisions for levy of penalty for default in furnishing return of wealth have been omitted. (2) The new provisions for levy of penalties for failure to comply with notices under sections 16(2) and 16(4) provide for a minimum penalty of Rs. 1,000 and a maximum penalty of Rs. 25,000 for each default. Under the old provisions, penalty was computed with reference to the amount of wealth-tax which would have been avoided if the returned net wealth would have been accepted as the correct net wealth. (3) Provisions for levy of penalty for concealment of wealth remain the same. (4) A new Explanation 6 has been inserted in sub-section (1) to provide that penalty for concealment of wealth should not be imposed on that portion of wealth which is enhanced as a result of adjustments made under section 16(1)(a) and on which additional wealth-tax has already been charged under section 16(1A). (5) Under a new sub-section (3) substituted in the section, prior approval of the Deputy Commissioner would be necessary, if-- (i) the penalty is to be imposed by the Income-tax Officer and it exceeds Rs. 10,000 ; (ii) the penalty is to be imposed by the Assistant Commissioner and it exceeds Rs. 20,000. Under the old provisions, approval of the Deputy Commissioner was necessary for imposing penalty for concealment of wealth if the amount of concealed wealth exceeded Rs. 25,000. (6) Under the old provisions of sub-section (5) of the section, time-limit for imposition of penalties under the section was provided, which was on the same lines as under the old provisions of section 275 of the Income-tax Act, i.e., it was generally more than two years (refer to para 16.18 ante.). A new sub-section (5) has been substituted in the section to provide for reduced time-limits for imposition of penalties under this section, which are exactly on the same lines as the amended provisions of section 275 of the Income-tax Act (refer to para 16.19 ante). (7) A new sub-section (6) has been inserted in the section to provide for a transitory provision, namely, that the penalties for the assessment year 1988-89 and earlier assessment years shall be levied in accordance with the provisions of section 18 as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989). Thus, the amended provisions of section 18 would apply from the assessment year 1989-90 onwards. The effect is that the old limitation provisions contained in sub-section (5) of the section would apply up to the assessment year 1988-89, while the new limitation provisions, contained in the newly substituted sub-section (5) of the section, would apply from the assessment year 1989-90 onwards. To this extent, the provisions of section 18 of the Wealth-tax Act are different front the corresponding provisions in the amended section 275 of the Income-tax Act, where the application of the old or the new limitation provisions has been made dependent upon whether the penalty has been initiated on or before 31st March, 1989, or after this date (refer to para 16.21 ante). (ii) Changes made in section 18A (corresponding to some of the penalties provided in section 272A of the Income-tax Act), -- (1) Penalty for non-compliance of a summons issued under section 37(1) either to attend to give evidence or produce books of account or other documents at a certain place and time has been included in a new clause (c) of sub-section (1) of the section. Earlier, penalty for this default was provided in section 37(2). (2) Penalty leviable for defaults covered by sub-section (1) of the section is a minimum of Rs. 500 and a maximum of Rs. 10,000 for each default. Under the old provisions, the penalty leviable could extend up to Rs. 1,000 only and no minimum penalty was provided. (3) Penalty leviable for default covered by sub-section (2) of the section is a minimum of Rs. 100 and a maximum of Rs. 200 for every day during which the default continues. Under the old provisions of sub-section (2), the penalty leviable could extend to Rs. 10 only for every day of default and no minimum penalty was provided. (4) It has been provided that a penalty under this section can be imposed by the Deputy Director or the Deputy Commissioner. However, where the failure or default occurs in the course of any proceedings before a wealth-tax authority not lower in rank than a Deputy Director or a Deputy Commissioner, the penalty can be imposed by such wealth-tax authority. NOTE : Unlike section 18, there are no limitation provisions in section 18A. Therefore, penalties leviable under section 18A do not get time-barred. [Section 142 of Amending Act, 1987] [Sections 68, 69 and 95(p) of the Amending Act, 1989] 22. Amendments to section 37, relating to power to take evidence on oath, etc., by the Amending Act, 1987, and by the Finance Act, 1988.--Section 37 of the Wealth-tax Act contains provisions corresponding to the provisions of section 131 of the Income-tax Act. Amendments made to section 131 of the Income-tax Act by the Amending Act, 1987, and by the Finance Act, 1988, have already been discussed in paras 9.1 to 9.3 ante. The Amending Act, 1987, and the Finance Act, 1988, have also amended section 37 of the Wealth-tax Act to bring its provisions on the same lines as the provisions of the amended section 131 of the Income-tax Act. [Section 153 of the Amending Act, 1987] [Sections 64 and 88 (f) of the Finance Act, 1988] 23. Amendments to section 37A, relating to power of search and seizure, by the Amending Act, 1987, and by the Finance Act, 1988.--Section 37A of the Wealth-tax Act contains provisions corresponding to the provisions of section 132 of the Income-tax Act relating to the power of search and seizure. However, under the old provisions of section 37A of the Wealth-tax Act, there were no provisions corresponding to sub-sections (5) to (7), (11) and (12) of section 132 of the Income-tax Act, relating to the passing of a summary order in respect of the seized assets for retaining the same in pursuance of such order and for filing and disposal of appeals against such orders. The Amending Act, 1987, has made substantial amendments to section 37A of the Wealth-tax Act to include these provisions also in that section. The Amending Act, 1987, and the Finance Act, 1988, have also made other amendments to section 37A of the Wealth-tax Act, which are on the same lines as the amendments made to section 132 of the Income-tax Act (refer to paras 9.4 to 9.8 ante). The effect is that the provisions of the amended section 37A of the Wealth-tax Act are now exactly on the same lines as the provisions of the amended section 132 of the Income-tax Act. [Section 154 of the Amending Act, 1987] [Section 95 (g) of the Finance Act, 1988] Amendments to the Gift-tax Act, 1958 24. The Amending Act, 1987, has made amendments to the provisions of the Gift-tax Act, relating to powers of gift-tax authorities, collection and recovery of tax, refunds, appeals, penalties and non-application of the Act in certain cases, in order to bring these provisions in line with the corresponding provisions of the Income-tax and the Wealth-tax Acts, as they have emerged after their amendment by the said Amending Act, 1987, and which have been discussed in the preceding paras in this Part of the explanatory notes. Any gap or shortcomings in this respect have been removed through certain amendments made by the Amending Act, 1989. The Table below shows the provisions of the Gift-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987, and the Amending Act, 1989, which have carried out the necessary amendments and the subject-matter of the amendments in brief. Sl No. Section of the Amending Act, 1987/ Amending Act, 1989 Section of the Gift-tax Act that has been amended Corresponding section of the Income-tax Act Subject-matter of the amendment in brief (1) (2) (3) (4) (5) 1. 162 (c) of the Amending Act, 1987 2 (xvii) (omitted) Definition of 'partner' omitted consequent upon its inclusion in a new clause (xi) substituted in the section (refer Sl. No. 3 below). 2. 162 (d) of the amending Act, 1987 2(vii) new clause substituted) Substitution of the definition of 'company', by the definitions of 'company' 'Indian company' and company in which the public are 'substantially interested', which have the same meaning as in section 2 of the income-tax Act. 3. 162 (e) of the Amending Act, 1987 2(xi) new clause substituted) Substitution of the definition of 'partner' by the definitions of 'firm', 'partner' and 'partnership' which have the same meaning as in section 2 of the Income-tax Act. 4. (i) 174 of the Amending Act, 1987, (ii) 86, 87 and 95 (p) of the Amending Act, 1989 17 17(A) 271, 272A(1) (a) to (c) 272A(2) (c), 274 275 Amendments of penalty provisions in the G.T.Act to bring them in line with the corresponding provisions in the Income-tax Act. 5. (i) 176 of the Amending Act, 1987 (ii) 88 of the Amending Act, 1989 22 246 Amendments to section 22 relating to appeals to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) from the orders of the Assessing Officer. 6. 178 of the Amending Act, 1987 32 320 Amendments to section 32 relating to time for payment of tax demand and charge of interest for delayed payments. 7. 179 (b) of the Amending Act, 1987 33 221-232 Second Third Schedules Amendments to section 33 relating to mode of recovery consequent upon the abolition of the post of "Tax Recovery Commissioner". 8. (i) 180 (I) of the Amending Act, 1987, (ii) 90 (a) of the Amending Act 1989 33A(1) 240 Amendments to section 33A(1) relating to refund on appeals, etc. *9. 182 of the Amending Act, 1987 36 131 Amendments to section 36 relating to power to take evidence on oath, etc. 10. 183 of Amending Act, 1987 37 Amendments to section 37 relating to power of the gift-tax authorities to call for information returns and statement. *11. (i) 184 of the Amending Act, 1987, (ii) 93 94(t) of the Amending Act, 1989 45 Amendments to section 45 relating to non-application of the provisions of Gift-tax Act in certain cases. * NOTES : (i) Sections 175 and 177 of the Amending Act, 1987, had introduced new sections 18B and 22A in the Gift-tax Act to provide for charging of additional gift-tax at 20% of gifts and for moving an application by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for deciding an issue before completion of assessment. These new sections have, however, been omitted by the Amending Act, 1989. This has been discussed in Para 256 ante. and items at serial No. 10 and 11 in the Table given in that Para. (ii) The amendments indicated at serial Nos. 4, 9 and 11 of the above Table, which are star-marked, are further explained in the following paras : 25. Amendments to sections 17 and 17A, relating to penalties under the Gift-tax Act, by the Amending Art, 1987, and the Amending Act, 1989. --Sections 17 and 17A of the Gift-tax Act contain provisions for levy of penalties under the Gift-tax Act, which are on the same lines as those in sections 18 and 18A of the Wealth-tax Act. The Amending Act, 1987, and the Amending Act, 1989, have made amendments to the said sections 17 and 17A of the Gift-tax Act on the same lines as the amendments made to sections 18 and 18A of the Wealth-tax Act (refer to para 21 ante). The effect is that the penalty provisions contained in sections 17 and 17A of the Gift-tax Act and in sections 18 and 18A of the Wealth-tax Act are on similar lines, including the reduced time-limit for imposition of penalties under section 17 of the Gift-tax Act and under section 18 of the Wealth-tax Act. It may be mentioned that, under the old provisions of section 17 of the Gift-tax Act, there were no limitation provisions, so that the penalties leviable under this section did not get time barred. However, limitation provisions have now been introduced in section 17 of the Gift-tax Act. on the same lines as in section 18 of the Wealth-tax Act. There are, however, no limitation provisions in section 17A of the Gift-tax Act, as well as in section 18A of the Wealth-tax Act. [Section 174 of the Amending Act, 1987] [Sections 86, 87 and 95 (p) of the Amending Act, 1989] 26. Amendments to section 36 relating to power to take evidence on oath, etc., by the Amending Act, 1987, and by the Finance Act, 1988. Section 36 of the Gift-tax Act contains provisions corresponding to the provisions of section 131 of the Income-tax Act and section 37 of the Wealth-tax Act. The Amending Act, 1987, and the Finance Act, 1988, have amended section 36 of the Gift-tax Act to bring the provisions of sub-sections (1) and (1A) of the section on the same lines as the provisions of sub-sections (1) and (1A) of section 131 of the Income-tax Act, and the provisions of sub-sections (1) and. (1A) of section 37 of the Wealth-tax Act as discussed in paras 9.1 to 9.3 and 22 ante. [Section 182 of the Amending Act, 1987] [Sections 70 and 80(k) of the Finance Act, 1988] 27.1 Amendments to section 45, relating to the non-application of the provisions of the Gift-tax Act, in certain cases, by the Amending Act, 1987, and by the Amending Act, 1989.--.Under the old provisions of section 45 of the Gift-tax Act, it was provided that the provisions of this Act shall not apply to gifts made by,-- (i) any Government company, Government Corporation or other company which is not a private company, as listed in clauses (a) to (d) of the section ; (ii) any company to art Indian company in a scheme of amalgamation ; (iii) any institution or fund, income whereof is exempt from income-tax under section 11 or section 12 of the Income-tax Act. 27.2 This section started with the opening words " The provisions. of this Act shall not apply to gifts made by ". The purpose of the enactment of section 45 is that no gift-tax should be levied in respect of gifts made by Government companies and corporations, public limited companies and public charitable and religious trusts. The intention of the section would be more clear if the section starts with the opening words "No tax shall be levied under this Act in respect of gifts made by". It may be mentioned that these opening words have been used in the corresponding section 45 of the Wealth -tax Act. 27.3 Further, the object of the section to exempt all Government companies and Corporations and public limited companies from the purview of the Gift-tax Act will be achieved it, instead of listing all these in clauses (a) to (d), it is simply stated that the gift-tax shall not be levied on a "company in which the public are substantially interested". As per the amended section 2(vii) of the Gift-tax Act, this expression has the same meaning as in section 2 of the Income-tax Act, which is wide enough to cover all such Government Corporations and companies and public companies. 27.4 Therefore, to achieve the aforesaid objectives, the Amending Act, 1987, and the Amending Act, 1989, have amended section 45 of the Gift-tax Act. The combined effect of the amendments made by both the Amending Acts is that the following changes have been made in the said section 45 : (i) The opening words "The provisions of this Act shall not apply to gifts made by" have been substituted by the opening words "No tax shall be levied under this Act in respect of gifts made by". (ii) Clauses (a) to (d) have been substituted by a single clause (a), which refers to "a company in which the public are substantially interested". Thus, the benefit of exemption under this section is extended to all companies in which the public are substantially interested which expression, according to its definition, in section 2(vii), has the same meaning as in section 2 of the Income-tax Act. (iii) Consequential amendments have also been made in clause (da) and Explanation II (which is renumbered as Explanation I), while Explanation I has been omitted. [Section 184 of the Amending Act, 1987] [Sections 93 and 95 (t) of the Amending Act, 1989] (Sd.) K. K. Mittal, Director (TPL-II ). [F. No. 131/40/89-TPL]