Finance (No. 2) Act, 1996--Explanatory Notes on provisions relating to Direct Taxes--Introduction - Income Tax - 762/1998

Finance (No. 2) Act, 1996--Explanatory Notes on provisions relating to Direct Taxes--Introduction Circular 762 Dated 18/2/1998 The Finance (No. 2) Act, 1996, as passed by Parliament, received the assent of the President on the 28th day of September, 1996, and has been enacted as Act No. 33 of 1996. This circular explains the substance of the provisions of the Act relating to direct taxes. Changes made by the Finance (No. 2) Act, 1996 2. The Finance (No. 2) Act, 1996 (hereinafter referred to as the Finance Act) has,-- --amended sections 2, 10, 12A, 16, 17, 24, 28, 32, 35, 35AC, 36, 40A, 41, 43, 43B, 45, 56, 80D, 80G, 80GG, 80-IA, 80L, 80R, 80RR, 80RRA, 88, 88B, 112, 115AC, 115K, 120, 139, 148, 153, 158B, 158BB, 158BE, 158BG, 194A, 199, 206C, 208, 234C and 272A of the Income-tax Act, 1961 ; --inserted new sections 12AA, 54EA, 54EB, 80CCC, 80DDB and 115JA of the Income-tax Act, 1961 : --omitted sections 80CC, 80J, 88A, 206A and 206B of the Income-tax Act, 1961 ; and --amended sections 2, 4 and 21A of the Wealth-tax Act, 1957. Provisions in brief 3. The provisions of the Finance (No. 2) Act, 1996, in the sphere of direct taxes relate to the following matters :-- I. Prescribing the rates of income-tax on incomes liable to tax for the assessment year 1996-97, the rates at which tax will be deductible at source in the financial year 1996-97 from interest (including interest on securities), dividends, winnings from lotteries or crossword puzzles, winnings from horse races, commission and other categories of income liable for tax deduction at source under the Income-tax Act ; rates for computing "advance tax", deduction of income-tax from "salaries" and charging of income-tax on current income ; certain cases for the financial year 1996-97. II. Amendment of the Income-tax Act, 1961, with a view to,-- --exempting the commuted value of pension received from a fund set up by the Life Insurance Corporation of India and granting of deduction in respect of contribution to such fund ; --extending income-tax exemption on account of interest payable on money borrowed abroad to facilitate expansion projects of railways ; --granting exemption to SAARC fund for regional projects ; --granting exemption infrastructure development funds and companies ; --granting exemption to associations of registered trade unions ; --registration of charitable and religious trusts ; --Raising of standard deduction in the case of low-paid salaried employees ; --Increasing the limit of deduction allowable for interest payable on borrowed capital in respect of self-occupied house property ; --extending of deduction on account of interest payable on borrowed capital in respect of house property which is vacant due to employment, etc., elsewhere ; --modifying the provisions relating to depreciation ; --modifiying the provisions relating to allowance of weighted deduction in respect of any sum paid for scientific research undertaken under a programme ; --modifying the provisions relating to expenditure on eligible projects or schemes ; --modifying the provisions relating to deduction from profits derived from the business of providing long-term finance ; --amending section 40A(3) of the Income-tax Act, to raise the monetary limit for payment in cash from rupees ten thousand to rupees twenty thousand ; --modifying the provisions relating to profits chargeable to tax ; --modifying the provisions containing definitions of certain terms relevant to income from profits and gains of business or profession ; --modifying the provisions regarding certain deductions to be allowed on actual payment ; --exempting long-term capital gains in the case of investment in specified assets ; --omitting of redundant sections of the Income-tax Act, 1961. --enhancing the amount of deduction in respect of medical insurance premia. --allowing deduction in respect of medical treatment of chronic and protracted diseases and terminal ailments such as AIDS, thalassemia, etc. --allowing 100 per cent. deduction of donations made to a fund set up by a State Government for the medical relief of the poor. --allowing 100 per cent. deduction of donations made to National or State Blood Transfusion Councils and also to funds set up by the Armed Forces. --raising the monetary limits in respect of rents paid ; --providing tax holiday for companies engaged in scientific and industrial research and development activity on commercial basis under section 80-IA of the Income-tax Act ; --providing tax holiday to infrastructure facilities in the nature of water supply, irrigation, sanitation and sewerage projects. --raising of deduction in respect of dividends and from units of mutual funds ; --rationalising the tax concessions in respect of foreign exchange earnings from service export under sections 80R, 80RR and 80RRA ; --allowing rebate on subscription to shares and debentures offered in approved issues of public companies for infrastructure and power sectors ; --allowing rebate of income-tax in case of senior citizens. --reducing the tax rate on long-term capital gains for all resident assessees ; --providing concessional tax on income from shares, etc., in public sector companies disinvested by the Government ; --providing alternative minimum tax on companies ; --extending the due date for filing the return of income in the case of a working partner of a firm ; --modifying provisions regarding issue of notice where income has escaped assessment ; --amending time limit for completion of assessments and reassessments ; --rationalising special procedure for assessment of search cases ; --raising the limit for tax deduction at source in the case of housing finance companies under section 194A of the Income-tax Act ; --enlarging of the scope of credit for tax deducted at source in cases of income derived from any jointly owned property or jointly owned deposits or jointly owned units apart from jointly owned security or share in a company ; --omit sections 206A and 206B of the Income-tax Act ; --reduce the rate of collection of tax at source ; --enhance the threshold limit for payment of advance tax ; --modify the provisions relating to the payment of advance tax relatable to capital gains, etc., to allow payment of advance tax in the remaining instalments in a financial year. III. Amendment to the Wealth-tax Act, 1957, with a view to,-- --enlarging the definition of the term assets in order to bring commercial buildings, which are not occupied by the assessee for the purpose of business or profession other than the business of letting out properties, under the purview of the Wealth-tax Act ; --modifying the provisions of the Wealth-tax Act regarding inclusion of certain assets in the net wealth in order to bring harmony between the provisions under the Income-tax Act and the Wealth-tax Act ; and --modifying the provisions of the Wealth-tax Act to clarify the amendment regarding assessment in cases of diversion of property, or of income from property, held under trust for public charitable or religious purposes. IV. Income-tax exemption to the North-Eastern Development Finance Corporation Limited (NEDFC). Income-tax I. Rates of income-tax in respect of incomes liable to tax for the assessment year 1996-97 4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1996-97, the rates of income-tax (including surcharge thereon in the case of domestic companies) have been specified in Part I of the First Schedule to the Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1995, for the purposes of computation of "advance tax", deduction of tax at source from "salaries" and charging of tax payable in certain cases during the financial year 1995-96. II. Rates for deduction of income-tax at source during the financial year 1996-97 from income other than "salaries" 5.1 The rates for deduction of income-tax at source during the financial year 1996-97 from incomes other than "salaries", have been specified in Part II of the First Schedule to the Act. These rates apply to income by way of interest on securities, interest other than "interest on securities", dividends, insurance commission, winnings from lotteries or crossword puzzles, winnings from horse races and income of non-residents (including non-resident Indians). These rates are the same as those specified in Part II of the First Schedule to the Finance Act, 1995, for the purposes of deduction of income-tax at source during the financial year 1995-96. 5.2. The amount of income-tax, so deducted at source, shall be increased in the case of a domestic company, by a surcharge calculated at the rate of 7.5 per cent. of such income-tax. III. Rates for deduction of income-tax at source from "salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1996-97 6. The rates for deduction of income-tax at source from "salaries" during the financial year 1996-97 and also for computation of "advance tax" payable during that year in the case of all categories of taxpayers, have been specified in Part III of the First Schedule to the Act. These rates are also applicable for charging income-tax during the financial year 1996-97 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping profits arising in India to non-residents, assessment of persons leaving India for good during that financial year, assessment of persons who are likely to transfer property to avoid tax or where an order has to be passed in a search and seizure case where search was initiated before the 1st day of July, 1995, for calculating the amount of tax on the estimated undisclosed income, etc. The salient features of the rates prescribed in the said Part III are indicated in the following paragraphs. A. Individuals, Hindu undivided families, etc. 7.1 Paragraph A of Part III of the First Schedule specifies the rates of income-tax in the case of individuals, Hindu undivided families, association of persons, etc. 7.2 There is no change in the exemption limit which continues to remain at Rs. 40,000. The income slabs and the tax-rates are also the same except that the rate applicable in the first income slab, i.e., between Rs. 40,001 and Rs. 60,000, has been reduced from 20 per cent. to 15 per cent. 7.3 The Table below gives the income slabs and the rates of income-tax (a) as specified in sub-paragraph I of Paragraph A of Part I of the First Schedule to the Act, i.e., the existing slabs and rates ; and (b) as specified in Paragraph A of Part III of the First Schedule to the Act, i.e., the slabs and rates :-- Table Income slab Rates specified in Sub-Paragraph I of Paragraph a of Part I of the First Schedule to the act Income slab Rates specified in Paragraph a of Part III of First Schedule to the Act Upto to 40,000 Nil Upto Rs. 40,000 Nil Rs. 40,001 - Rs. 60,000 20% Rs. 40,001 - Rs. 60,000 15% Rs. 60,001 - Rs. 1,20,000 30% Rs. 60,001 - Rs. 1,20,000 30% Above Rs. 1,20,000 40% Above Rs. 1,20,000 40% 7.4 The impact of reduction of the tax rate in the first income slab in the case of individuals, Hindu undivided families, etc., at different income levels would be as under : Total income Existing Tax New Tax Proposed Relief (Rs.) Liability (Rs.) Liability (Rs.) Amount (Rs.) Percentage relief 41,000 200 150 50 25 42,000 400 300 100 25 43,000 600 450 150 25 44,000 800 600 200 25 45,000 1,000 750 250 25 50,000 2,000 1,500 500 25 55,000 3,000 2,250 750 25 60,000 4,000 3,000 1,000 25 75,000 8,500 7,500 1,000 11.8 1,00,000 16,000 15,000 1,000 6.3 1,20,000 22,000 21,000 1,000 4.5 1,50,000 34,000 33,000 1,000 2.9 2,00,000 54,000 53,000 1,000 1.9 7.5 There will now be no distinction in the tax rates applicable to specified Hindu undivided families (i.e., those with one or more members having independent total income exceeding the exemption limit) and unspecified Hindu undivided families and the same rates, i.e., those specified in Paragraph A of Part Ill of the First Schedule to the Act, will apply to all Hindu undivided families.8. In the case of co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. B. Co-operative societies : 8. In the case of a co-operative societies, the rates of income-tax have been specified in Paragraph B of Part III of the First Schedule to the Act, These rates are the same as those specified in the corresponding Paragraph of Part i of the First Schedule to the Act. C. Firms : 9. In the case of firms, the rate of income-tax has been specified in Paragraph C of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. D. Local authorities : 10. In the case of local authorities, the rate of income-tax has been specified in Paragraph D of Part III of the First Schedule to the Act. This rate is the same as that specified in the corresponding Paragraph of Part I of the First Schedule to the Act. E. Companies : 11. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule to the Act. F. Surcharge : 12. In the case of domestic companies, surcharge has been reduced from the existing rate of 15 per cent. to 7.5 per cent. of the amount of income-tax where the total income exceeds seventy-five thousand rupees. This will have the effect of reducing the tax burden of such companies by 3 per cent. [Section 2 and First Schedule] Income-tax exemption to pension funds set up by the Life Insurance Corporation of India, deduction for contributions and exemption for commuted value 13.1 The Life Insurance Corporation of India (LIC) has started a new personal-cum-family pension scheme. The scheme offers attractive terms to its contributors and has a provision for payment of a life-time widow's pension in the event of the death of the contributor during the contribution period. 13.2 With a view to making the aforesaid pension scheme popular, a deduction of up to ten thousand rupees has been provided to an individual in respect of any contribution made towards the scheme. The amount of pension received in the hands of the contributor or the nominees shall be taxable. However, the commuted amount receivable on maturity of the scheme shall be exempt. 13.3 Further, in order to enable th e LIC to offer attractive terms to the contributors, exemption from income-tax has been provided to the income of such funds which the LIC has set up on or after the August 1, 1996, under the scheme to which contributions are made by the contributors. 13.4 It is also provided that the pension scheme will be approved by the "Controller of Insurance". "Controller of Insurance" shall mean an officer appointed by the Central Government to perform the duties of the Controller of Insurance under the Insurance Act, 1938 (4 of 1938). 13.5 The amendment will take effect from April 1, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Sections 4 and 23] Taxation of a sum received under the keyman insurance policy 14.1 A Keyman Insurance Policy of the Life Insurance Corporation of India, etc., provides for an insurance policy taken by a business organisation or a professional organisation on the life of an employee, in order to protect the business against the financial loss, which may occur from the employee's premature death. The "Keyman" is an employee or a director, whose services are perceived to have a significant effect on the profitability of the business. The premium is paid by the employer. 14.2 There were some doubts on the taxability of the income including bonus, etc., from such policy and also regarding the treatment of the premium paid--whether it should be allowed as a capital expenditure or as a revenue expenditure. The Act, therefore, lays down the tax treatment of the Keyman Insurance Policy. 14.3 Clause (10D) of section 10 of the Income-tax Act exempts certain income from tax. The Act amends clause (10D) of section 10 to exclude any sum received under a Keyman Insurance Policy including the sum allocated by way of bonus on such policy for this purpose. 14.4 The Act also lays down that the sums received by the said organisation on such policies, be taxed as business profits ; the surrender value of the policy, endorsed in favour of the employee (Keyman), or the sum received by him at the time of retirement be taken as "profits in lieu of salary" for tax purposes ; and in case of other persons having no employer-employee relationship, the surrender value of the policy or the sum received under the policy be taken as income from other sources and taxed accordingly. The premium paid on the Keyman Insurance Policy is allowed as business expenditure. 14.5 The amendments take effect from the 1st day of October, 1996. [Section 3, 4, 8, 10 and 21] Income-tax exemption to facilitate expansion projects of Railways 15.1 Under the existing provisions of the Income-tax Act, the interest payable by Government or an industrial undertaking on moneys borrowed abroad is not chargeable to tax in the hands of the recipient under clause (15) of section 10 of the Act, subject to approval by the Government. 15.2 Konkan Railway Corporation Limited is engaged in the construction of a railway line. If the railway line were to be constructed by the Ministry of Railways, income-tax would not be leviable on the interest payable to a foreign lender as Railways are part of the Government. However, the interest payable by Konkan Railway Corporation to foreign lenders has to suffer tax, which has to be borne by the Corporation as it is not an "industrial undertaking" as per the meaning given to the expression in the relevant section. 15.3 The Act has, therefore, widened the scope of the definition of the expression "industrial undertaking" so as to include therein an undertaking engaged in construction or operation of rail systems also. 15.4 The amendment will take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 4] Income-tax exemption to SAARC Fund for regional projects 16.1 The SAARC fund for regional projects (SFRP) was established in 1991 by the Colombo Declaration of the Heads of State or Government of the member-countries of the South Asian Association for Regional Co-operation (SAARC) with a view to making available credit on easy terms for the identification and development of projects having a regional character in the fields of industry, energy, agriculture and service sectors. Respective national contributions to the fund are held by the Nodal Development Financing Institutions (DFIs) of SAARC member-countries. India's contribution is held by the Industrial Development Bank of India (IDBI) which earns income out of investment of these funds. 16.2 Keeping in view the objectives of the fund, income of the SAARC Fund for regional projects has been exempted from income-tax so as to ensure that the resources at the disposal of the fund and particularly, income earned on India's contribution is used only for the purposes for which the fund has been set up. 16.3 The Act, therefore, inserts a new clause (23BBC) in section 10 of the Income-tax Act so as to allow income-tax exemption to any income of the SAARC Fund for regional projects. 16.4 The amendment will take effect retrospectively from 1st April, 1992, and will, accordingly, apply in relation to the assessment year 1992-93 and subsequent years. [Section 4] Income-tax exemption to infrastructure development funds and companies 17.1 In recognition of the need for adequate infrastructure facility which is vital for accelerating the economic development of the country, the existing provisions of the Income-tax Act provide a five-year tax holiday to an enterprise carrying on the business of developing, maintaining and operating any infrastructure facility. However, in order to attract further investment to this sector, an urgent need has been felt for providing more tax incentives to investors. 17.2 The Act, therefore, provides tax exemption to such infrastructure capital funds and companies which are established for the purposes of mobilising resources for financing infrastructure facilities. 17.3 Accordingly, any income by way of dividends, interest or long-term capital gains of an infrastructure capital fund or an infrastructure capital company from investment made by way of shares or long-term finance in any enterprise carrying on the business of developing, maintaining and operating any infrastructure facility which fulfils the conditions specified in sub-section (4A) of section 80-IA has been exempted from income-tax. 17.4 The expression "infrastructure capital fund" shall mean a fund operating under a trust deed registered under the provisions of the Registration Act, 1908, established to raise moneys for investments by way of acquiring shares or providing long-term finance to an enterprise engaged in providing infrastructure facility. The expression "infrastructure capital company" shall mean a company which has made investment by way of acquiring shares or providing long-term finance to an enterprise engaged in the business of providing infrastructure facility. The expression "infrastructure facility" shall mean a road, highway, bridge, airport, port, a rail system, or any other public facility of a similar nature as may be notified by the Central Board of Direct Taxes in this behalf in the Official Gazette. It will also include water supply projects, sewerage, sanitation or irrigation systems. The expression "long-term finance" shall mean any loan or advance which is repayable along with the interest during a period of not less than five years. 17.5 The amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 4] Income-tax exemption to associations of registered trade unions 18.1 Under the existing provisions of clause (24) of section 10, any income of a registered union within the meaning of the Trade Unions Act, 1926 (16 of 1926), under the heads "Income from house property" and "Income from other sources" is exempt from income-tax if such trade union is formed primarily for the purpose of regulating the relations between workmen and employer or between workmen and workmen. 18.2 The Act, in line with the above, provides similar exemption to an association of trade unions of the nature specified under the existing provisions of clause (24) of section 10. 18.3 The amendment will take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 4] Registration of charitable and religious trusts 19.1 Under the existing provisions of the Income-tax Act, exemption from income-tax in respect of the income of a charitable or religious trust or institution is available only if the conditions specified in that section are satisfied. One of these conditions is that the person in receipt of the income shall make an application for registration of the trust or institution in the prescribed form and in the prescribed manner to the Chief Commissioner or the Commissioner of Income-tax within the specified time. However, there was no provision in the Income-tax Act for processing of such an application and granting or refusal of registration to the concerned trust or institution. 19.2 Hence the Act now provides for a procedure to be followed for grant of registration to a trust or institution. According to this procedure, the Chief Commissioner or Commissioner shall call for documents and information and conduct enquiries to satisfy about the genuineness of the trust or institution. After he is satisfied about the charitable or religious nature of the objects and genuineness of the activities of the trust or institution, he will pass an order granting registration. If he is not so satisfied, he will pass an order refusing registration. However, an opportunity of being heard shall have to be provided to the applicant before an order of refusal to grant registration is passed by the Chief Commissioner or the Commissioner. The reasons for refusal of registration shall also have to be mentioned in that order. The order granting or refusing registration has to be passed within six months from the end of the month in which the application for registration is received by the Chief Commissioner or the Commissioner and a copy of such order shall be sent to the applicant. 19.3 It has also been provided that the grant of registration shall be one of the conditions for grant of income-tax exemption. 19.4 These amendments shall take effect from the 1st day of April, 1997. [Sections 5 and 6] Raising of standard deduction in the case of low-paid salaried employees . 20.1 Under the existing provisions of section 16 of the Income-tax Act, a standard deduction of a sum equal to 33-1/3 per cent. of the salary or Rs. 15,000, whichever is less, is allowed to a person having income from salary. A higher standard deduction of Rs. 18,000 is allowed to working women whose total income does not exceed Rs. 75,000. 20.2 The Finance Act has enhanced the upper limit of the standard deduction to eighteen thousand rupees in the case of employees having income up to sixty thousand rupees. In any other case, the existing limit of deduction shall continue. 20.3 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 7] Increase in the limit of deduction allowable for interest payable on borrowed capital in respect of self-occupied house property 21.1 Income under the head "Income from house property" is calculated after allowing certain specified deductions from the annual value of house property. One of the deductions is the amount of interest payable on borrowed capital used for acquisition, construction, repair, renewal or reconstruction of the house property. In respect of self-occupied house property, the annual value is taken at nil. As no notional income is taken into account in respect of such property, none of the deductions, except on account of interest, is allowed. Interest on borrowed capital in respect of such property is allowed only up to Rs. 10,000. 21.2 It has been felt that the deduction of Rs. 10,000 is not adequate to meet the cost of finance. Therefore, in order to provide relief to many middle class taxpayers, the Act enhances the limit of deduction on account of interest payable on borrowed capital in respect of self-occupied house property from Rs. 10,000 to Rs. 15,000. 21.3 The amendment will take effect from 1st April, 1997, and will, accordingly apply in relation to the assessment year 1997-98 and subsequent years. [Section 9] Extending the deduction on account of interest payable on borrowed capital in respect of house property which is vacant due to employment etc. elsewhere 22.1 The annual value of self-occupied house property is taken at nil. Under the provisions of section 23(3), if the property cannot be occupied by the owner by reason of the fact that owing to his employment, business or profession carried on at any other place, he has to reside at that other place in a building not belonging to him, the annual value of such property is also taken at nil provided that such house is not actually let and no other benefit therefrom is derived by the owner. 22.2 Deduction on account of interest payable on borrowed capital is allowed up to Rs. 10,000 in the case of self-occupied property. No such deduction is, however, available to assessees who are unable to occupy the property by reason of their employment, etc. at a place other than where the property is situated. 22.3 The denial of this deduction is a case of genuine hardship. The Act, therefore, extends the deduction on account of interest payable on borrowed capital to such class of persons also. 22.4 The amendment will take effect retrospectively from 1st April, 1995, and will, accordingly, apply in relation to the assessment year 1995-96 and subsequent years. [Section 9] Modification of provisions relating to depreciation 23.1 Section 32 allows depreciation in respect of buildings, machinery, plant or furniture owned by the assessee and used for the purposes of the business or profession. The admissibility of the allowance is based upon two conditions, namely, that the asset is owned by the assessee and it is used for the purposes of the business or profession. In the case of Banarasi Das Gupta v. CIT [1987] 166 ITR 783 (SC), it was held that there is hardly any scope for holding the view that the benefit of section 10(2)(vi) of the Act (1922 Act concerning allowance of depreciation) would be admissible in respect of fractional ownership of the asset. The Supreme Court further pointed out that under the scheme of the Act, it is the assessee who alone is entitled to maintain such claim of depreciation and it would indeed be difficult within the framework of the deduction contained in the statute to maintain a separate value of a portion of the asset to work out depreciation. A large number of big projects are currently being undertaken in which cost of the assets are financed by a number of companies without the intention of holding the assets jointly as an association of persons and, therefore, each of the participating company owns a fraction of the asset. The asset is subject to wear and tear on use. However, the aforesaid decision of the Supreme Court comes in the way of allowing the depreciation allowance. An amendment has therefore been made to supersede the ratio of this decision. Deduction on account of depreciation in the case of fractional ownership of an asset shall consequently now be available. 23.2 The third proviso to sub-section (1) of section 32 provides that the depreciation allowance will be restricted to fifty per cent. of the amount calculated at the prescribed rates in cases where assets acquired by an assessee during the previous year are put to use for the purpose of business or profession for a period of less than one hundred and eighty days in that previous year. Thus, in the cases of succession in business and amalgamation of companies, the predecessor in business and the successor or amalgamating company and amalgamated company, as the case may be, are entitled to depreciation allowance on the same assets, which in the aggregate may exceed the depreciation allowance admissible for a previous year at the rates prescribed in Appendix I of the Income-tax Rules, 1962. An amendment has, therefore, been made to restrict the aggregate deduction for this allowance in a year in such cases to the amount computed at the prescribed rates. It has also been provided that the allowance shall be apportioned in the ratio of the number of days for which the asset is put to use in such cases. 23.3 Sub-section (2) of section 32 provides for carry forward of unabsorbed depreciation allowance. Under this sub-section, where full effect cannot be given to the depreciation allowance in any previous year, owing to there being no profits or gains chargeable for that year, or owing to the profits or gains chargeable being less than the allowance, the allowance or part thereof to which effect has not been given shall be added to the amount of allowance for depreciation for the following previous year and deemed to be part of that allowance for that previous year, and so on for the succeeding previous years. The net effect is that unabsorbed depreciation allowance of one year is added to the depreciation allowance of the next year. Thus, the unabsorbed depreciation allowance, in a case where profits are insufficient in the subsequent years, is carried forward indefinitely. On the other hand, the business losses are allowed to be carried forward for a period of eight years only. By an amendment the business loss and the unabsorbed depreciation have been brought at par for the purposes of set off and carry forward notwithstanding the fact that sub-section (2) of section 72 maintains a distinction between them regarding the priorities. 23.4 In order to help the revival of sick companies, an amendment has been made which provides that the period of rehabilitation of such a company, as ordered by the BIFR, shall be excluded in reckoning the period of eight years now prescribed for the purposes of carry forward and set off of the unabsorbed depreciation. 23.5 Sub-section (2) of section 32, as it existed upto assessment year 1996-97, provided that the unabsorbed depreciation of a year shall be added to the amount of the allowance for depreciation of the following previous year and deemed to be part of that allowance. Therefore, the unabsorbed depreciation allowance, if any, of the assessment year 1996-97 shall be added to the amount of the allowance for depreciation of assessment year 1997-98 and deemed to be part of the allowance for this year. In other words, the unabsorbed depreciation allowance of assessment year 1996-97 shall be added to the allowance of 1997-98 and will be deemed to be the allowance of that year. The limitation of eight years shall start from the assessment year 1997-98. 23.6 These amendments take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 11] Modification of provisions relating to allowance of weighted deduction in respect of any sum paid for scientific research undertaken under a programme 24.1 Under the existing provisions of sub-section (2AA) of section 35, one of the pre-condition for allowance of weighted deduction to an assessee is that the sum paid to a National Laboratory or a University or an Indian Institute of Technology shall be used for scientific research undertaken under a programme approved in this behalf by the prescribed authority. For this purpose, the prescribed authority is the Director-General (Income-tax Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research. By an amendment the requirement of approval of the programme by the aforesaid prescribed authority has been dispensed with and, henceforth, the requisite approval is to be given by the head of the National Laboratory or the University or the Indian Institute of Technology, as the case may be. Necessary amendment in rule 6 of the Income-tax Rules, 1962, has been made separately for this purpose. 24.2 This amendment will take effect from the 1st day of October, 1996, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 12] Modification of provisions relating to expenditure on eligible projects or schemes 25.1 Section 35AC provides that where an assessee incurs any expenditure by way of payment of any sum to a public sector company or a local authority or to an association or institution approved by the National Committee for carrying out any eligible project or scheme, he shall be allowed a deduction of the amount of such expenditure incurred during the previous year. The Explanation under this section defines "eligible project or scheme" to mean a project or a scheme for promoting the social and economic welfare of, or uplift of, the public, as the Central Government may, by notification in the Official Gazette, specify in this behalf on the recommendations of the National Committee. The section, however, does not confer any power on the National Committee in explicit terms to withdraw the approval granted to an association or an institution, or to recommend to the Central Government the denotification of an eligible project or a scheme. 25.2 It is generally understood that, the power of approval normally includes the power to withdraw the approval. By an amendment statutory recognition to the aforesaid principle has been given by vesting the requisite powers in the National Committee to withdraw approval, earlier granted to an association or to an institution, and to recommend the withdrawal of notification regarding an eligible project or a scheme to the Central Government. 25.3 The proposed amendment will take effect from the 1st October, 1996. [Section 13] Modification of the provisions relating to deduction from profits derived from the business of providing long-term finance 26.1 Under the existing provisions of section 36(1)(viii), subject to certain conditions deduction is allowable from the total income, in respect of any special reserve created by a financial corporation or a public company engaged in providing long-term finance to certain specified sectors. The expression "long-term finance" was not earlier defined. By the amendment in the Finance Act, the expression "long-term finance" has been defined to mean any loan or advance where the terms under which monies are loaned or advanced provide for repayment along with interest thereon during a period of not less than five years. 26.2 The second proviso to clause (viii) of sub-section (1) of section 36 restricts the aggregate of amounts which can be carried to the special reserve account from time to time by a financial corporation etc. to twice the amount of the paid-up share capital. In order to give further incentive to such financial corporations and companies, which satisfy the other criteria laid down in this clause, an amendment has been made to provide that the ceiling for amounts credited to special reserve shall now be twice the amount of paid-up share capital excluding the amounts capitalised from reserves. 26.3 These amendments take effect from the 1st day of April, 1996, and will accordingly, apply in relation to the assessment year 1996-97 and subsequent years. [Section 14] Amendment of section 40A(3) 27.1 Sub-section (3) of section 40A of the Income-tax Act, 1961, provides that where a payment is made of a sum exceeding ten thousand rupees otherwise than by a crossed cheque drawn on a bank or a crossed bank draft, 20 per cent. of such expenditure shall not be allowed as a deduction. The provisions regarding part disallowance of the expenditure were introduced by the Finance Act, 1995, with effect from April 1, 1996. Prior to this, the whole of such expenditure was to be disallowed. The monetary limit was raised from two thousand five hundred rupees to ten thousand rupees by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. The value of the rupee has substantially depreciated since 1989. Therefore, the present provision causes a lot of hardship to assessees, especially to transport and civil contractors and others, who are engaged in trades where, looking to the exigencies of business, payment has to be made in cash. In order to remove their hardship, an amendment has been made to raise the limit from ten thousand rupees to twenty thousand rupees. 27.2 This amendment will take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 15] Modification of provisions relating to profits chargeable to tax 28.1 Sub-section (1) of section 41 deals with profits chargeable to tax. Clause (a) of this sub-section provides that where an allowance or a deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee, and subsequently during any previous year, the assessee has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained or the value of benefit accruing to him shall be deemed to be the profits, and accordingly chargeable to income-tax as income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. Clause (b) of this sub-section makes similar provision in the case of a successor in business in regard to any amount in respect of which loss or expenditure etc. was incurred by the predecessor. 28.2 It was found that a number of assessees were escaping tax liability under this sub-section in regard to the credit of trading liabilities to profit and loss account, even when the recovery of the debt had become barred by limitation or when there was no likelihood of the liability being enforced against them. This was on account of the fact that some courts held that the liability can remit or cease only by a bilateral or a multilateral act between the creditor(s) on the one side and the debtor on the other and not by a unilateral act. By an amendment the expression "loss or expenditure or some benefit in respect of any such trading liability by way of remission or cessation thereof", occurring in this sub-section, has been defined to include the remission or cessation of any liability by a unilateral act by the first mentioned person under clause (a) or the successor in business under clause (b) of this sub-section by way of writing off such liability in his accounts. 28.3 This amendment will take effect from the 1st day of April, 1997, and will, accordingly, applying relation to the assessment year 1997-98 and subsequent years. [Section 16] Modification of provisions containing definitions of certain terms relevant to income from profits and gains of business or profession 29.1 Sub-section (1) of section 43 defines the term "actual cost" to mean the actual cost of the assets to the assessee reduced by that portion of the cost thereof, if any, as has been met directly or indirectly by any other person or authority. This sub-section contained a proviso and eight explanations, which explain the meaning of the term "actual cost" in various situations. A number of cases have come to notice where the instrument of sale and lease back (SLB) transactions has been used by the assessees, as a tax planning device, to reduce their tax liabilities by claiming higher depreciation. There have been cases where assets, having nil or nearly nil written down value, have been sold at higher prices, especially where 100 per cent. depreciation allowance is admissible, and the buyers again claimed depreciation on these assets at the sale values. There have also been cases where such SLB transactions have been effected at prices much higher than the fair market values of the assets. In order to curb such transactions, an amendment has been made, to deal with a case where an asset has been sold and reacquired by an assessee by way of hire, lease or otherwise. In such a case, the "actual cost", for the purpose of deduction of depreciation allowance shall be taken to be the written down value at the time of transfer of the asset in the hands of the seller, who subsequently acquires the asset by way of hire, lease or otherwise. It has also been provided that even if there are one or more intermediate sales between the point of first sale and reacquisition by the first seller, the cost will be the written down value at the time of first sale. Even if the asset forms part of a block of assets, the individual written down value has to be worked out separately to give effect to this provision. 29.2. This provision will apply in respect of sale and lease back transactions made on or after the 1st day of October, 1996. [Section 17] Modification of provisions regarding certain deductions to be allowed on actual payment 30.1 Existing provisions of section 43B allow the deduction of any sum payable by an assessee as interest on any loan or borrowing from any public financial institution, or a state financial corporation or a state industrial investment corporation in the year in which such interest is actually paid irrespective of the year in which the liability to pay such sum was incurred by the assessee. By an amendment, the scope of this section has been expanded to cover interest on any term loan from a schedule bank. In order to avoid deduction of the same liability twice, it has been provided that in a case where interest on such a loan had been provided on due basis and already allowed in any assessment, the deduction for such interest shall not be subsequently allowed on the ground that it has been paid in a subsequent year. 30.2. This amendment will take effect from the 1st day of April, 1997, and, accordingly, will apply in relation to the assessment year 1997-98 and subsequent years. [Section 18] Exemption of long-term capital gains in the case of investment in specified assets 31.1 Under the provisions of section 54E, long-term capital gains were exempt from tax where the net consideration received or accruing on transfer of a capital asset was invested or deposited in specified financial assets. This exemption ceased to be available in respect of assets transferred after March 31, 1992. 31.2 In order to provide an impetus to investment in priority sectors of the economy, the Act inserts two new sections 54EA and 54EB. 31.3 The salient features of section 54EA are : (i) Exemption from capital gains to be available in cases where investment in specified bonds, debentures or units of any mutual fund referred to in clause (23D) of section 10 is made out of the net consideration received or accruing from the transfer of the capital asset. The aforementioned assets, re-investment in which will qualify for exemption, would be notified by the Board in the Official Gazette. (ii) Where only part of the net consideration is invested in specified bonds, debentures or units, proportionate exemption will be available. (iii) A "lock-in-period" of three years has been provided during which the specified bonds, debentures or units must be held by the assessee in order to be eligible for the exemption. (iv) Provision for withdrawal of the exemption if the specified bonds, debentures or units are transferred before the expiry of the "lock-in" period. (v) Where the bonds, debentures or units are transferred or otherwise converted into money (e.g., by pledging them and taking a loan or advance against their security) at any time within the "lock-in" period, the long-term capital gain which was exempted earlier would be taxed in the year of such transfer. (vi) Where exemption from capital gains is availed of in respect of re-investment in specified bonds, debentures or units, rebate under section 88 not to be available. 31.4 Section 54EB provides that the capital gain arising from the transfer of a long-term capital asset will be exempt from tax if the capital gain so arising is re-invested within six months in specified assets to be notified by the Board. If part of the capital gain is so invested in the specified assets, proportionate exemption would be available. A lock-in- period of seven years is prescribed. If the asset is transferred before the expiry of the lock-in-period of seven years, the exemption will be liable to be withdrawn. 31.5 The amendments will take effect from 1st October, 1996, and will apply in the cases where transfer takes place on or after the 1st day of October, 1996. [Sections 19 and 20] Omission of redundant sections of the Income-tax Act, 1961 32. The Finance Act has omitted sections 80CC, 80J and 88A from the Income-tax Act with effect from April 4, 1993, April 1, 1989, and April 1, 1994, respectively, as they have become redundant. [Sections 22, 29 and 35] Enhancement of deduction in respect of medical insurance premia 33.1 Section 80D of Income-tax Act, 1961, provides for a deduction up to Rs. 6,000 from the total income of an assessee, being an individual or a Hindu undivided family, in respect of any sum paid by cheque, to effect or keep in force an insurance on the health of the individual and his family members (including dependent parents). 33.2 The Act has raised the monetary limit of deduction under section 80D from its present level of Rs. 6,000 to Rs. 10,000. 33.3 This amendment shall be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 24] Deduction in respect of medical treatment of chronic and protracted diseases and terminal ailments such as AIDS, Thalassemia, etc. 34.1 The Finance Act has inserted a new section 80DDB in the Income-tax Act. 34.2 Under the existing provisions of section 80DD of the Income-tax Act, an individual or a Hindu undivided family is entitled for a deduction of fifteen thousand rupees, towards the medical treatment, training and rehabilitation of a dependant, if the latter is suffering from a permanent physical disability (including blindness) or mental retardation. A similar provision in section 80U of the Income-tax Act, provides for a deduction of forty thousand rupees to a resident individual, who is suffering from a permanent physical disability (including blindness) or mental retardation. The eligibility criteria of the permanent physical disability are prescribed under the relevant rules. 34.3 The Finance Act has inserted a new section 80DDB in the Income-tax Act so as to provide for a separate deduction in respect of chronic and protracted diseases and terminal ailments, to an individual suffering from such diseases or to any individual or HUF, on whom the diseased individual is dependent upon. The deduction shall be limited to fifteen thousand rupees. The diseases eligible for the deduction shall be notified in the Income-tax Rules, 1962. The assessee shall have to submit a certificate of the disease, from a prescribed authority working in a Government hopsital, every year along with the return of the income. 34.4 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 25] 100 per cent. deduction of donations made to a fund set up by a State Government for the medical relief of the poor 35.1 Under section 80G of the Income-tax Act, a deduction from total income is allowed in respect of donations made by an assessee. In most cases the deduction is 50 per cent. of the donations. However, in respect of donations to certain funds and universities, deduction of 100 per cent. is allowed. 35.2 Certain State Governments have proposed to establish funds to provide medical relief to poor people. The funds shall be constituted with the help of grants from the State Governments and donations from individuals and trade bodies. 35.3 The Finance Act has amended section 80G of the Income-tax Act, 1961, to provide for 100 per cent. deduction for donations made to these funds. 35.4 This amendment will be effective from April 1, 1997, i.e., in respect of the assessment year 1997-98 and subsequent years. Thus, persons making donations during the financial year ended on March 31, 1997, will be eligible to obtain the deduction as above. [Section 26] 100 per cent. deduction to donations made to National or State Blood Transfusion Councils and also to funds set up by the Armed Forces 36.1 The Supreme Court had directed the Union Government in the case of Common Cause v. Union of India, to take steps to establish a National Council of Blood Transfusion, as a society registered under the Societies Registration Act, 1860. In consultation with the National Council, the State Governments shall establish State Councils. The National and the State Councils shall frame programmes covering the entire range of services related to operation and requirement of blood banks and shall be empowered to collect funds from trade, industry and individuals. 36.2 In order to facilitate the collection of funds for the National and the State Blood Transfusion Councils, the court directed the Government of India (Ministry of Health and the Ministry of Finance) to find out ways and means to secure grant of 100 per cent. exemption from income-tax to the donors in respect of donations made to the National Council and the State Councils. 36.3 To give effect to the above, the Finance Act has amended section 80G of the Income-tax Act, 1961, to provide for deduction at 100 per cent. for donations made to the National Council of Blood Transfusion headed by an officer not below the rank of an Additional Secretary to the Government of India dealing with the Aids Control Project, and the State Councils headed by the secretary, health of the concerned State Government, to be set up in consultation with the National Council. 36.4 The Finance Act has further amended section 80-G to provide for deduction at 100 per cent. to donations made to the following funds of the Armed Forces :-- (i) The Army Central Welfare Fund, (ii) The Indian Naval Benevolent Fund, and (iii) The Air Force Central Welfare Fund. 36.5 These amendments also take effect from the assessment year 1997-98 and shall apply to the donations made during the financial year 1996-97 and subsequent years. [Section 26] Raising of monetary limits in respect of rents paid 37.1 Under section 80GG of the Income-tax Act, an assessee, not in receipt of house rent allowance, is entitled to a deduction, in respect of house rent paid by him in excess of 10 per cent. of his total income, subject to a ceiling of Rs. 1,000 per month or 25 per cent. of his total income for the year, whichever is less. 37.2 The Finance Act has raised the monetary limit to Rs. 2,000 per month without modifying the other ceiling of deduction in terms of percentage of the total income, which is 25 per cent. The lower of the two ceilings will be admissible as deduction. 37.3 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 27] Tax holiday for companies engaged in scientific and industrial research and development activity on commercial basis under section 80-IA of the Income-tax Act 38.1 Under the provisions of section 80-IA, new industrial undertakings are allowed a deduction of 25 per cent. (30 per cent. for companies) for the first ten years (twelve years for the co-operative sector) of production. However, for an industrial undertaking engaged in the generation or generation and distribution of power or to an industrial undertaking set up in specified backward States/districts, a five-year full tax holiday is allowed, while normal deduction 25 per cent. (30 per cent. for companies) is allowed for the balance period after the five-year holiday. 38.2 The five-year tax holiday for the power sector and for industries in backward States is applicable for industries which commence production between April 1, 1993, and March 31, 1998. For industries in notified backward districts, the tax holiday is applicable for units which commence production between October 1, 1994, and March 31, 1999. The backward districts have not so far been notified. For all other industries, the tax holiday is applicable for units commencing production between April 1, 1991, and March 31, 1995. However, the tax holiday is available even after March 31, 1995, for small scale units commencing production between April 1, 1995, and March 31, 2000. 38.3 The Finance Act, 1995, provided for five-year tax holiday and a deduction of 30 per cent. in the subsequent five years to an enterprise operating and maintaining an infrastructure facility on Build-Operate-Transfer (BOT) or on Build-Own-Operate Transfer (BOOT) basis. 38.4 The Finance (No. 2) Act, 1996, provides for a five-year tax holiday to the approved companies engaged in scientific and industrial research and development activities, on commercial lines. This incentive shall be available to any company that has as its sole objective, the activities in the areas of scientific and industrial research and development and which have been accorded approval by the prescribed authority, viz., the Secre-tary, Department of Scientific and Industrial Research. 38.5 The tax holiday shall be available to any company, whether new or existing, which is accorded approval by the prescribed authority any time before the 1st day of April, 1998. The 100 per cent. deduction for a five-year period, shall commence from the assessment year relevant to the previous year in which the approval by the prescribed authority is accorded to such a company. 38.6 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 28] Tax holiday to infrastructure facilities in the nature of water supply, irrigation, sanitation and sewerage projects 39.1 The Finance Act, 1995, has introduced a new sub-section (4A) in section 80-IA of the Income-tax Act, 1961, which provides for a five-year tax holiday and a deduction of 30 per cent. in the subsequent five years (within a period of initial twelve assessment years), to a company or a consortium of companies, operating and maintaining an infrastructure facility on Build-Operate-Transfer (BOT) or on Build-Own-Operate-Transfer (BOOT) basis, subject to certain conditions specified in that sub-section. The infrastructure facility shall be ultimately transferred to the Government. The deduction has been restricted to infrastructure facilities in the nature of roads, highways, bridges, airports, ports, rail systems or any other public facility of a similar nature. 39.2 The Finance Act has amended section 80-IA of the Income-tax Act, so as to extend the benefit of tax holiday, to other infrastructure facilities like the water supply projects, irrigation systems, sanitation and sewerage systems. 39.3 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 28] Raising of deduction in respect of dividends and from units of mutual funds 40.1 Section 80-L of the Income-tax Act, 1961, provides for deduction up to Rs. 13,000 from the gross total income of an individual or a Hindu undivided family in respect of income earned by way of interest from the Government securities, National Savings Certificate, deposits, etc. and dividends from any Indian company or income from the units of the mutual fund specified under clause (23D) of section 10. The Finance Act provides for a further deduction of Rs. 3,000 in respect of dividends from any Indian company and income from units of mutual funds within an overall ceiling of Rs. 15,000. 40.2 The amendment takes effect from the assessment year 1997-98. [Section 30] Rationalisation of the tax concessions in respect of foreign exchange earnings from service export under sections 80R, 80RR and 80RRA 41.1 Under section 80R of the Income-tax Act, a professor, teacher or a research worker rendering service abroad, is entitled for a deduction from the remuneration received from a foreign university, institution, etc., while computing his income chargeable to tax in India. This deduction is available to a resident, being an Indian citizen. 41.2 Section 80RR, a similar provision is available to an artist, playwright, musician, actor, etc., deriving income from a foreign source, in exercise of his profession, even in India. This section is available to a resident in India, who need not be an Indian citizen. 41.3 A similar deduction is available under section 80RRA, to persons proceeding on assignments abroad and who are liable to pay tax in India on the entire remuneration received abroad. This deduction is available to an Indian citizen, who is a resident. 41.4 The existing provisions provide for a deduction equal to 50 per cent. of such income or remuneration, even if no foreign exchange is repatriated. However, if the amount equal to 75 per cent. of foreign exchange brought into India is more than this figure, such higher amount is allowable as deduction. 41.5 This amendment has linked the deduction under these sections to repatriation of foreign exchange. The deduction under sections 80R, 80RR and 80RRA shall now be equal to 75 per cent. of the foreign exchange earnings, which are brought in India within a period of six months from the end of the previous year. The assessee shall have to furnish a certificate in the prescribed form along with the return of income for claiming the deduction. The due date for filing the return of income in such cases, has also been extended to 31st October. 41.6 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 31, 32 and 33] Rebate on subscription to shares and debentures offered in approved issues of public companies for infrastructure and power sectors 42.1 Under the existing provisions of section 88 of the Income-tax Act, a tax rebate of twenty per cent. of the sums paid or deposited in the life insurance premia, provident fund, etc., is available to an individual or a Hindu undivided family, subject to a maximum of twelve thousand rupees. 42.2 With a view to channelise the savings of the taxpayers in the infrastructure sector including power, it is proposed to provide for a tax rebate of a sum equal to twenty per cent. of the amounts invested in debentures and equity shares and units of any mutual fund of a public company engaged in infrastructure including power sector. 42.3 The following are the salient features of the provision-- (i) The eligible shares/debentures or units of mutual fund shall form part of the public issue, which is approved by the Central Board of Direct Taxes on an application made by the company in the prescribed form, in the prescribed manner, setting forth the prescribed particulars. (ii) The proceeds of the issue are wholly and exclusively utilised for the purpose of developing, maintaining and operating a new "infrastructure facility", as defined under clause (ca) of sub-section (12) of section 80-IA of the Income-tax Act, or for generating or for generating and distributing power. (iii) A lock-in-period of three years is to be provided in respect of such equity shares/debentures or units of the mutual fund. In the case of any transfer of shares or debentures before three years of acquisition, the entire amount of rebate of tax allowed earlier in any previous year, shall be treated as tax payable in the hands of the subscriber, in the year in which it is transferred. (iv) Where a deduction is claimed and allowed under this clause, the cost of such shares/debentures or units of the mutual fund shall not be taken into account for the purposes of sections 54E and 54EB. (v) The amendment provides that in respect of the eligible shares/debentures or units of the mutual fund, a higher limit of qualifying investment of seventy thousand rupees shall be available, as against sixty thousand rupees in the case of other qualifying investment. By investing only in such shares/debentures or units a maximum tax rebate of fourteen thousand rupees may be claimed. In respect of other qualifying investments, the maximum rebate shall continue at the existing level of twelve thousand rupees, which may, however, be extended up to fourteen thousand rupees, on further investment up to ten thousand rupees, in the aforesaid shares or debentures. 42.4 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 34] Rebate of income-tax in the case of senior citizens 43.1 Section 88B of the Income-tax Act provides for a special tax relief in the form of an additional rebate of forty per cent. from the net tax payable by persons who have attained the age of 65 years and have a gross total income not exceeding one hundred thousand rupees. The maximum tax rebate available is Rs. 6,400 at present. 43.2 The Finance Act has extended the existing rebate to the individuals of sixty-five years and above and whose gross total income does not exceed Rs. 1,20,000. 43.3 This amendment will be effective from April 1, 1997, and shall apply to the assessment year 1997-98 and subsequent assessment years. [Section 36] Reduction of tax rate on long-term capital gains for domestic companies, etc. 44.1 As per section 112 of the Income-tax Act, long-term capital gains arising to various persons are taxed at the following rates : Category of person Rate of long-term capital gains tax Individual/HUF 20 per cent. Domestic company 30 per cent. Non-resident (not being a company) 20 per cent. or a foreign company Any other case of a resident 30 per cent 44.2 In order to place all these taxable entities on the same footing, the Act reduces the rate of long-term capital gains tax in the case of a domestic company and any other case of a resident to 20 per cent. 44.3 The amendment will take effect from 1st April, 1997, and will accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 37] Provision for concessional tax on income from shares, etc., in public sector companies disinvested by Government 45.1 Under the existing provisions of section 115AC of the Income-tax Act, concessional treatment is available to non-resident taxpayers in respect of income arising by way of interest, dividends or long-term capital gains from such bonds or shares of an Indian company which are issued in accordance with a scheme notified by the Central Government and which are purchased in foreign currency. Such income is charged to tax at a rate of 10 per cent. only. 45.2 The Act has extended this concessional treatment to income by way of interest, dividends or long-term capital gains, on such bonds or shares of a public sector company which are sold either by the Central Government or by a State Government to a non-resident assessee in foreign currency. 45.3 The amendment will take effect from 1st April, 1997, and will, accordingly, apply in realtion to the assessment year 1997-98 and subsequent years. [Section 38] Alternative minimum tax on companies 46.1 In recent times, the number of zero-tax companies and companies paying marginal tax has grown. Studies have shown that inspite of the fact that companies have earned substantial book profits and have paid handsome dividends, no tax has been paid by them to the exchequer. 46.2 The Finance Act has inserted a new section 115JA of the Income-tax Act, so as to levy a minimum tax on companies who are having book profits and paying dividends but are not paying any taxes. The scheme envisages the payment of a minimum tax by deeming 30 per cent. of the book profits computed under the Companies Act, as taxable income, in a case where the total income as computed under the provisions of the Income-tax Act, is less than 30 per cent. of the book profit. Where the total income as computed under the normal provisions of the Income-tax Act, is more than 30 per cent. of the book profit, tax shall be charged on the same. 46.3 The effective minimum alternate tax, at the existing rates of taxation works out to 12 per cent. of the book profits. 46.4 Income arising from free trade zone (FTZ), export oriented undertakings (EOUs), charitable activities, investment by a venture capital company and other exempted incomes (section 10) are excluded from the purview of the alternate tax. 46.5 Since the alternate tax is applicable only where the normal total income computed is less than 30 per cent. of the book profits, so long as the enterprises (other than FTZ units and EOUs) earning income from export profits do not have their component of export income higher than 70 per cent. of the book profits, the provisions of section 115JA will not be attracted. In other words, the MAT will apply only to such cases where export profits forming part of book profits of an assessee exceed 70 per cent. of the total profits. 46.6 Companies engaged in the business of generation and distribution of power and those enterprises engaged in developing, maintaining and operating infrastructure facilities under sub-section (4A) of section 80-IA are exempted from the levy of MAT, so that the incentive given to infrastructure development is not affected. 46.7 The amendment will take effect from 1st April, 1997, and will accordingly apply in relation to the assessment year 1997-98 and subsequent years. [Section 39] Extension of due date for filing the return of income in the case of a working partner of a firm 47.1 Section 139(1) of the Income-tax Act requires every person, whose income during the previous year exceeds the maximum amount not chargeable to tax, to furnish a return of his income on or before the due date. In the case of a firm carrying on business or profession whose accounts are required to be audited, the due date for filing of the return is the 31st October. In the case of a working partner of the firm, he would be obliged to furnish his return of income by the 31st day of August. The payment of remuneration to a working partner is to be worked out with reference to the book profits of the firm in accordance with the provisions of section 40(b)(v). The working partner is, therefore, not in a position to know his actual income by way of remuneration from the firm till its accounts are audited. 47.2 In order to remove this hardship Explanation 1 to sub-section (1) of section 139 has been amended to provide that the due date for filing of return of income by working partners of firms whose accounts are required to be audited shall be the 31st day of October of the assessment year, i.e., the due date for filing of the return will be the same in the case of a firm and its working partners. 47.3 The amendment will take effect from 1st April, 1997, and will, accordingly apply in relation to the assessment year 1997-98 and subsequent years. [Section 42] Modification of provisions of section 148 48.1 Under the existing provisions of the Income-tax Act, in cases where the Assessing Officer has reason to believe that income has escaped assessment, a notice can be issued to an assessee for filing a return of his income within a specified period, not being less than thirty days. In the notice under section 148, the assessee was required to furnish a return of his income within thirty days. The above position in law was in effect from April 1, 1989. 48.2 Notices issued under section 148 have been held to be invalid by the Income-tax Appellate Tribunal on the ground that whereas the statute allows the taxpayer a time, "not being less than thirty days", the notice gives the direction to file a return "within a period of thirty days". The Bombay High Court in the case of CIT v. Ekbal and Co. [1945] 13 ITR 154, decided a similar issue by laying down that the expressions "within thirty days" and "not less than thirty days" are two quite different things. In view of the aforesaid decisions of the Bombay High Court and also of the Income-tax Appellate Tribunal, the Act provides in section 148 that the Assessing Officer may require the assessee to furnish the return within the period specified in the notice. 48.3 The amendment will take effect retrospectively from April 1, 1989, and will, accordingly, apply in relation to notices issued under section 148 on or after that date. [Section 43] Amendment of time limit for completion of assessments and reassessments 49.1 Under the existing provisions of the Income-tax Act, the time limit for making an order of assessment is two years from the end of the assessment year in which the income was first assessable. However, in certain circumstances the time is extended, or certain periods are excluded from the period of limitation. 49.2 In cases where special audit is ordered, the Assessing Officer is of the opinion that, having regard to the nature and complexity of the accounts of the assessee and the interests of the Revenue, it is necessary so to do, he may, with the previous approval of the Chief Commissioner or Commissioner, direct the assessee to get the accounts audited by an accountant nominated by the Chief Commissioner or the Commissioner in this behalf. The assessee is required to furnish a report of such audit in the prescribed form duly signed and verified by the prescribed accountant. In such cases, the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited under section 142(2A) and ending with the date on which the assessee furnishes a report of such audit is excluded while reckoning the period of limitation for completion of the assessment. As per the existing provisions, the special audit report is to be submitted within the time allowed by the Assessing Officer subject to a maximum of 180 days. 49.3 It has been the experience of the Department that in a few cases where special audit is ordered, the assessees do not co-operate with the accountant as a result of which the report is not prepared and, therefore, not furnished. In such cases the normal time limit of two years is operative and the Assessing Officer does not get any additional time for the purpose of making an assessment because the time taken for furnishing the audit report is excluded only if the report of such audit is furnished. In order to overcome this problem, the Act provides that the period commencing from the date on which the Assessing Officer directs the assessee to get his accounts audited and ending on the date on which the report of such audit was required to be furnished, shall be excluded from the period of limitation. 49.4 The amendment will take effect from 1st April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 44] Rationalisation of special procedure for assessment of search cases 50.1 The Finance Act, 1995, introduced a new scheme of assessment of undisclosed income determined as a result of search. Under this scheme, the undisclosed income detected as a result of a search initiated after June 30, 1995, is assessed separately as the income of a designated period (block) consisting of ten previous years prior to the previous year in which the search was conducted and also the period of the current previous year up to the date of search. The undisclosed income is taxed at a flat rate of 60 per cent. 50.2 Field experience in the implementation of the new procedure for block assessments has shown that difficulties are arising in certain areas. These relate to :-- (a) Taxation of firms and partners : (i) The method of computation of "undisclosed income" of a firm and its partners has been laid down in section 158BB(1), which provides for the computation of undisclosed income of a firm and its partners before and after April 1, 1993, in accordance with the method of assessment applicable. As per this, in respect of the assessment years prior to the assessment year 1993-94, the firm and the partners would both suffer tax at 60 per cent. in respect of undisclosed income detected during the search in the case of the firm. From the assessment year 1993-94 onwards, the firm would first pay tax at 60 per cent. on undisclosed income. Due to adjustment of book profits, the partners' income on account of salary and interest may become higher and the differential would also become taxable at 60 per cent. (ii) In order to prevent double taxation of "undisclosed income" first in the hands of the firm and then again in the hands of the partners, the Act amends Explanation (b) to sub-section (1) of section 158BB to provide that in the case of a firm, its business income will be taken to be the income before allowing for deduction under clause (b) of section 40 as it existed before April 1, 1993, and also as per the present clause (b) of section 40. There would be no effect on the "undisclosed income" of the firm in the hands of the partners. (iii) The amendment will take effect retrospectively from 1st July, 1995. (b) Assessment procedure : (i) The authority competent to make the block assessment has been laid down in section 158BG of the Income-tax Act. As per this section, the order of assessment for the block period shall be passed by an Assessing Officer not below the rank of an Assistant Commissioner. (ii) The time limit for completion of block assessment is prescribed in section 158BE of the Income-tax Act. As per this section, the order under section 158BC shall be passed within one year from the end of the month in which the last of the authorisation for search under section 132 or for requisition under section 132A, as the case may be, was executed. (iii) In order to facilitate the assessment process, and to ensure that the investigation is carried to its logical conclusion in a focused manner under section 2(7A) of the Act has been amended to include the Assistant Director of Income-tax within the meaning of "Assessing Officer", enabling him to discharge the assessment functions also. As a corollary to this, section 158BG has also been amended to provide that the block assessment order shall be passed after obtaining the approval of the Director of Income-tax in cases where the ADIT (Inv.) acts as the Assessing Officer. (iv) The amendments will take effect from 1st October, 1996. (c) Definition of "block period" : (i) Under section 158B(a), the block period has been defined to include ten previous years preceding the previous year in which the search was conducted under section 132. Before the adoption of the uniform previous year, assessees were allowed to have any accounting period as the previous year under section 3 of the Income-tax Act. Consequently, the block period would be different in different cases depending upon the previous years adopted by the assessees before April 1, 1989. (ii) In view of this, the Act amends the definition of block period as consisting of previous years relevant to ten assessment years. This will make the block period uniform in the case of all assessees. (iii) The amendment will take effect retrospectively from 1st July, 1995. (d) Special audit : (i) Under the provisions of section 142(2A), the Assessing Officer may with the approval of the Chief Commissioner or the Commissioner, direct the assessee to get his accounts audited by a chartered accountant. (ii) In the new scheme of block assessment of search cases, difficulty is being experienced in getting such special audit done. This is for the reason that section 158BA(1) contains a non-obstante clause which states that notwithstanding anything contained in any other provisions of the Act, the Assessing Officer shall proceed to assess the undisclosed income in accordance with the provisions of Chapter XIV-B. A time limit of one year for completion of the block assessment has been prescribed under section 158BE. In a case where a special audit is required, the time taken in obtaining the report of such audit is excluded by virtue of item (iii) of Explanation 1 to section 153. Due to the operation of the non-obstante clause, this exclusion of time is not possible in cases of block assessment. Hence in such cases very little time is left available for completing the assessment. (iii) In order to remove the difficulty outlined above, the Act amends section 158BE to provide for exclusion from the period of limitation of the period commencing on the day on which the Assessing Officer directs the assessee to get his accounts audited and ending on the day on which the assessee is required to furnish the report of such audit. (iv) The amendment will take effect retrospectively from 1st July, 1995. (e) Stay granted by courts : (i) Item (ii) of Explanation 1 of section 153 provides for exclusion from the period of limitation of the period during which a stay or injunction has been granted by a court in respect of any assessment proceedings. This enables the Assessing Officer to complete the assessment on vacation of the stay, even after the expiry of the normal period of limitation. There is no such specific provision in Chapter XIV-B of the Act in respect of the block assessments. In view of the non obstante clause, the exclusion provided in section 153 would not be available in such block assessment cases. Situations may arise where a stay is granted by a court in respect of block assessment cases. In such a situation, it is possible that the assessment may get barred by limitation due to operation of the non- obstante clause. (ii) In order to preclude such an eventuality the Act amends section 158BE to provide for exclusion from the period of limitation of the period during which stay granted by a court is in operation. (iii) The amendment will take effect retrospectively from 1st July, 1995. [Sections 3, 41, 45, 46, 47 and 48] Raising the limit for tax deduction at source in the case of housing finance companies under section 194A of the Income-tax Act 51.1 Under the existing provisions, no deduction of tax is required to be made by a person responsible for paying interest where the aggregate amount of interest likely to be credited or paid during a financial year to a payee does not exceed Rs. 2,500. 51.2 In the case of banking companies and co-operative societies, the provisions have been further relaxed and they are required to deduct tax only if the aggregate amount of interest on time deposits payable by a branch of such company or society to a payee in a year exceeds Rs. 10,000, as against the aforesaid general limit of Rs. 2,500. Similarly, the Unit Trust of India and the specified mutual funds are also required to deduct tax in accordance with section 194K of the Income-tax Act only if the aggregate amount of income payable by a branch of the trust or the fund under a particular scheme to a payee during a financial year exceeds Rs. 10,000. 51.3 Housing finance companies, which compete with banks and mutual funds to mobilise savings from the household sector, do not have the advantage of the higher limit for tax deduction at source available to the latter. In their case, the limit continues to remain at Rs. 2,500. 51.4 The Act, therefore, provides that the limit for tax deduction at source in the case of housing finance companies which are approved for the purpose of clause (viii) of sub-section (1) of section 36 shall also be Rs. 10,000. 51.5 The amendment is effective from the 1st day of October, 1996. [Section 49] Enlarging the scope of credit for tax deducted at source 52.1 Under the existing provisions of the Income-tax Act, credit for tax deducted at source is to be given to each co-owner in cases of jointly owned securities or shares in a company, in the same proportion in which the interest on such securities or dividend on such shares is assessable as income of each of such owners. 52.2 Through the Act, the scope of the aforesaid provision has been enlarged so as to cover other situations also in which income which is subjected to deduction of tax at source is assessable in the hands of two or more persons. For this purpose, the scope of the existing provision to allow credit for tax deducted at source is extended in cases of income derived from any jointly owned property or jointly owned deposits or jointly owned units apart from jointly owned securities or shares in a company. 52.3 The amendment will take effect from the 1st day of April, 1997, and will, accordingly, apply in relation to the assessment year 1997-98 and subsequent years. [Section 50] Omission of sections 206A and 206B of the Income-tax Act 53.1 Sections 206A and 206B of the Income-tax Act deal with furnishing of prescribed returns in respect of interest and dividend paid without deduction of tax at source in accordance with the provisions of the proviso to sub-section (1) of section 194A and the first proviso to section 194 respectively. However, sections 194A and 194 have been amended in the past and the said provisos have been omitted. Consequently, sections 206A and 206B have been rendered redundant. Section 197A now contains the procedure for obtaining payment of, inter alia, dividend and interest without deduction of tax at source. 53.2 The Act, therefore, has omitted sections 206A and 206B from the Income-tax Act. 53.3 The Act also omits the reference to sections 206A and 206B from section 272A which prescribes penalty for failure to file returns, statements etc. 53.4 The amendments are effective from the 1st day of October, 1996. [Section 51] Reduction in the rate of collection of tax at source 54.1 Under the existing provisions of the Income-tax Act, sellers of certain goods are required to collect tax from a buyer at the specified rates. 54.2 The specified percentage of collection of tax at source in the case of sale of alcoholic liquor and tendu leaves, at the rate of 15 per cent. is high. Collection of tax at a rate higher than the approximate tax liability affects the cash flow position of the traders and the Government also has to refund the extra tax along with interest. 54.3 The Act, therefore, reduces the rate of collection at source from fifteen per cent to ten per cent. in the cases of sale of goods comprising alcoholic liquor for human consumption (other than Indian-made foreign liquor) and tendu leaves. 54.4 The proposed amendment is effective from the 1st day of October, 1996. [Section 52] Enhancement of the limit for payment of advance tax 55.1 Under the existing provisions of the Income-tax Act, liability for payment of advance tax during a financial year arises when the amount of such tax payable during that year is one thousand five hundred rupees or more. 55.2 The limit of one thousand five hundred rupees was fixed in 1988. The low limit was causing inconvenience to smaller taxpayers and increasing workload for banks and the Income-tax Department. 55.3 The Act has, therefore, raised the threshold limit for payment of advance tax from the present one thousand five hundred rupees to five thousand rupees. 55.4 The amendment is effective from the 1st day of October, 1996. [Section 53] Payment of advance tax relatable to capital gains etc., to be allowed in the remaining instalments 56.1 Under the existing provisions of the Income-tax Act, penal interest is not charged on account of underestimate or failure to estimate either the amount of capital gains or of income from winnings from lottery, horse races, etc., if the assessee pays the whole of the tax payable in respect of such incomes, as part of the instalment of advance tax which is immediately due. 56.2 This requirement of paying the whole of the tax was causing hardship as the entire tax was required to be paid on a short notice. In many cases even the sale proceeds of the capital asset were not received before the advance tax payment became due. 56.3 The Act, therefore, allows the assessees to pay the tax relatable to the capital gains or to income from winnings from lottery, horse races, etc., as part of the remaining instalments of advance tax which are due in the financial year. 56.4 The amendment will take effect from 1st April, 1997, and accordingly, apply in relation to the assessment year 1997-98 and subsequent years. 56.5 The second proviso to sub-section (1) of section 234C(1) has also been omitted as it was applicable only to the assessment year 1991-92. [Section 54] Wealth-tax Amendment of the term "assets" 57.1 The term "assets", on which tax is to be levied, is defined in clause (ea) of section 2. This definition includes any guest house and any residential house (including a farm house situated within 25 kms of the local limits of any municipality) except the assets mentioned in sub-clauses (1) and (2) of this clause. If residential houses have been taken as assets, there seems to be no reason why commercial properties, other than those used by the assessees wholly and exclusively in his business or profession, should also be not taken as assets. By an amendment, commercial buildings, which are not occupied by the assessee for the purpose of his business or profession, other than the business of letting out properties, shall be brought to tax under the Wealth-tax Act, 1957. 57.2 This provision will take effect from the 1st day of April, 1997, and, accordingly, will apply in relation to the assessment year 1997-98 and subsequent years. [Section 56] Amendment of provisions regarding inclusion of certain assets in the net wealth 58.1 Under the Wealth-tax Act, specified assets are includible in the wealth of a legal owner. An exception to this general rule is provided in section 4 of the Act. Sub-section (7) of section 4 provides that where a building or a part thereof is allotted or leased to a member of a co-opera-tive housing society under a house building scheme of the society, the member shall be deemed to be the owner of such building or part thereof. The corresponding provisions, dealing with similar situations, in the Income-tax Act, 1961, are found in clause (iii), clause (iiia) and clause (iiib) of section 27 of that Act. These clauses deem the beneficial owner to be the owner for the purposes of taxation in the following situations :-- (i) a member of a co-operative society or a company or any association of persons, to whom a building or part thereof is allotted or leased under a house building scheme of the society or the company or the association, as the case may be, (ii) a person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882. (iii) a person who acquires any rights, excluding any rights by way of a lease from month to month or for a period not exceeding one year, in or with respect to any building or part thereof, by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act. 58.2 In order to bring harmony between the provisions under the Income-tax Act and the Wealth-tax Act, the Wealth-tax Act has been amended. Henceforth, the beneficial owners of properties in all the cases understood under clause (iii) or clause (iiia) or clause (iiib) of section 27 of the Income-tax Act, shall be liable to pay wealth-tax. 58.3 This provision will come into force with effect from the 1st day of April, 1997, and, accordingly, will apply in relation to the assessment year 1997-98 and subsequent years. [Section 57] Clarificatory amendment regarding assessment in cases of diversion of property, or of income from property, held under trust for public charitable or religious purposes 59.1 Under the provisions of clause (i) of section 5, wealth-tax shall not be payable by an assessee in respect of any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India. Section 21A provides three exceptions to this general rule of non-payment of wealth-tax, in the following circumstances, namely :-- (i) where any part of such property or any income of such trust is used or applied, directly or indirectly, for the benefit of any person referred to in sub-section (3) of section 13 of the Income-tax Act, or (ii) where any part of the income of such trust enures, directly or indirectly, for the benefit of any person referred to in sub-section (3) of section 13 of the Income-tax Act, or (iii) where any funds of the trust or investment or deposit, or any shares in a company are held by the trust in contravention of the provisions of clause (d) of sub-section (1) of section 13 of the Income-tax Act. 59.2 Clause (i) of section 5 is a general section, dealing with non-payment of wealth-tax in respect of the assets held under a trust or other legal obligation, while section 21A carves out three exceptions to this general rule. Therefore, under the normal rules of construction of statutes, provisions contained in section 21A will override the provisions contained in clause (i) of section 5. Section 21A, as it stood prior to its amendment by the Finance Act, 1992, applicable with effect from April 1, 1993, contained a non obstante clause, embodying the aforesaid principle of the construction. This clause was omitted by the Finance Act, 1992. By an amendment the aforesaid position of law has been expressly clarified, by restoring the non obstante clause. 59.3 This amendment will take effect retrospectively from the 1st day of April, 1993, and will, accordingly, apply in relation to the assessment year 1993-94 and subsequent years. [Section 58] Income-tax exemption to North-Eastern Development Finance Corporation Limited (NEDFC) 60.1 The North-Eastern Development Finance Corporation Limited is registered as a company under the Companies Act, 1956. The company has an authorised capital of Rs. 500 crores and the initial contributions to capital are to be provided by financial institutions such as IDBI, ICICI and the UTI leaving scope for contribution from other investors subsequently. The company has been set up at Guwahati with the objective of financing creation, expansion and modernisation of industrial enterprises and infrastructure projects in the North-Eastern region of the country. 60.2 Being an infant development finance institution, serving in a very difficult region of the country, its income has been exempted from income-tax for ten years commencing from the assessment year 1996-97. [Section 88] (R. N. Dash), Director (TPL). [F. No. 142/90/97-TPL]