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TMI BlogAmendments at a glance ,Rate structure , Amendments to Income-tax Act , Amendments to Wealth-tax Act , Amendments to Gift-tax Act , Amendments to Companies (Profits) Surtax Act, Miscellaneous provisionsX X X X Extracts X X X X X X X X Extracts X X X X ..... rtain incomes of the resident of Ladakh 89-90 11(1A) Capital gains derived by charitable and religious trusts 73-78 13(4) Forfeiture of exemption from income-tax on the income of charitable or religious trusts in certain cases 79-80 16(iv) Deduction for expenses on travelling to salaried taxpayers 82-84 33(5) Development rebate—Notification for its withdrawal in respect of machinery or plant installed after 31-5-1974 26-28 36(1)(viii) Financial corporations providing long-term finance for agricultural development in India 50-51 37(3) and rule Expenditure incurred on travelling by employees and other 6D persons for the purpose of business or profession 24-25 40(c), Expenditure on provision of remuneration, benefit of amenity 58(1)(a)(iv) to directors of companies and certain other persons 20-23 40(a)(v), Expenditure on payment of salaries or provision of perqui- 40A(5)/6 sites to employees 15-19 54A Withdrawal of tax relief to foreign companies and foreign nationals on capital gains in certain cases 41-42 67(1)(a)/(4), Computation of a partner's share in the income of a firm, 86(iii) and the tax payable by him, where an unregistered firm is a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of jewellery, etc., and limiting of exemption in respect of motor cars, etc. 102-106 5(1)(xx) Shares in new industrial companies - Withdrawal of exemption from 107 5(1)(xxviii), Financial assets qualifying for exemption from wealth- (xxix), 21(4)/ tax 108-110 prov. 18(1)(i),(1A) Penalty for failure to furnish returns, etc. 92 32, Expln. II Recovery of wealth-tax arrears 111 Sch. Increase in the rates of ordinary wealth-tax in the case of individuals and Hindu undivided families 91-92 Gift-tax Act 2(xii), 4(2) Conversion of self-acquired property of an individual into property belonging to the Hindu undivided family of which he is a member 112-113 5(1)(v), (va) Drafting amendments as a result of section 88, being replaced by section 80G of the Income-tax Act 116 33, Expln. II Recovery of arrears of gift-tax 115 45, Expln. 3 Exemption of gifts made by charitable or religious institutions or funds 114 Surtax Act 18 Recovery of arrears of surtax 119 3rd Sch. Rates of surtax 117-118 Miscellaneous Provisions 30 Deposit Insurance Corporation 120-121 Rate structure Finance (No. 2) Act, 1971 Rates of income-tax for the assessment year 1971- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irm may be assessed as a registered firm and subjected to the tax chargeable on registered firms at the rates specified in this behalf in the annual Finance Act, and its partners charged to tax on their respective shares in the total income of the firm, where this course is beneficial to the Revenue. Finance (No. 2) Act, 1971 Rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities 4. The rates for deduction of tax at source during the financial year 1971-72 from incomes other than "salaries" and retirement annuities payable to partners, of registered firms engaged in specified professions, i.e., interest on securities, other categories of interest, dividends, and other categories of non-salary income of non-residents, are set forth in Part II of the First Schedule to the Finance (No. 2) Act, 1971. These rates differ from the rates specified in Part II of the First Schedule to the Finance Act, 1970, for purposes of deduction of tax at source from such incomes during the financial year 1970-71 in certain respects as explained hereinbelow : 1. Payments to residents other than companies - In the case of inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of dividends of the special category has been discontinued and the uniform rate of 24.5 per cent, which has so far been applicable to other dividend payments to foreign companies by domestic companies, has now been made applicable to all dividend payments by domestic companies to foreign companies. Finance (No. 2) Act, 1971 Rates for deduction of tax at source from "salaries" and for computation of "advance tax" during the financial year 1971-72 5. The Finance (No. 2) Act, 1971 follows the principle adopted in the Finance Acts of the preceding years that in prescribing the rates of tax and in making new provisions in the taxation laws, measures which have the effect of bringing about a change in the tax liability or which provide a tax incentive or disincentive in any sphere should apply prospectively to current incomes falling due for assessment in the next following assessment year, and not retrospectively to incomes earned in the past, except where there are special circumstances justifying the retrospective operation of any particular provision. In conformity with this principle, changes in the rates of tax which were considered necessary or desirable have been made operativ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ample I Total income Rs. 15,100 Income-tax Rs. 1,373 (Rs. 1,350 plus 23 per cent of Rs. 100) Surcharge leviable Under alternative (a) Rs. 205.95 (15 per cent of Rs. 1,373) Under alternative (b) Rs. 175.00 (Rs. 135, being 10 per cent of Rs. 1,350 which is the tax on a total income of Rs. 15,000 plus Rs. 40, being 40 per cent of the amount by which total income exceeds Rs. 15,000). As the surcharge calculated under alternative (b) is lower in amount, the surcharge leviable in this case will be Rs. 175 only. Example II Total income Rs. 15,200 Income-tax on Rs. 15,200 Rs. 1,396 (Rs. 1,350+23 per cent of Rs. 200) Surcharge leviable : Under alternative (a) Rs. 209.40 (15 per cent of Rs. 1,396) Under alternative (b) Rs. 215.00 (Rs. 135 plus Rs. 80, being 40 per cent of Rs. 200). As the surcharge calculated under alternative (a) is lower than that under alternative (b), the surcharge leviable will be that under alternative (a), i.e., Rs. 209.40. The marginal relief provision will not, therefore, apply at this level, or above it. 2. Co-operative societies and local authorities - In these cases, the rate of surcharge on income-tax has been increased from 10 per cent of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Finance (No. 2) Act, 1971 Priority industries 8. Under the existing law, income derived by certain domestic companies from specified priority industries is charged to tax on concessional basis. The priority industries specified for this purpose comprise the following : a. the business of generation or distribution of electricity or any other form of power; b. the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule; and c. the business of any hotel where this business is carried on by an Indian company and the hotel is, for the time being approved in this behalf by the Central Government. The concessional taxation of certain domestic companies in respect of their profits derived from these industries is brought about by allowing a deduction of a specified percentage of such profits in computing the total income of the domestic company vide section 80-I. Finance (No. 2) Act, 1971 9. The Finance (No. 2) Act, 1971 has am ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Daman and Diu, long-term savings through policies of life insurance or for deferred annuities on the life of any member of such association or body or on the life of any child or either member, as also through the Public Provident Fund and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for the tax relief. Prior to the amendment of section 80C by section 15 of the Finance (No. 2) Act, 1971, the tax relief was allowed by deducting 60 per cent of the first Rs. 5,000 of the qualifying savings plus 50 per cent of the balance of such savings, in computing the taxable income of the assessee. With a view to providing a further incentive for effective long-term savings, particularly by taxpayers in the lower and middle income brackets, the following changes have been made in the relevant provisions : 1. The quantum of the deduction in respect of long-term savings in computing the taxable income has been varied so as to allow a deduction of the whole of the first Rs. 1,000 of the qualifying savings plus 50 per cent of the next Rs. 4,000 plus 40 per cent of the remainder of such savings. [This will mean that in the case of a person who saves Rs. 1,000 or less, the whole of su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t will, therefore, not be allowed henceforth in the case of other categories of taxpayers, such as companies, partnership firms, etc. 2. Deposits with a co-operative society made by a member of the society have been included in the categories of financial assets specified in the provision. Accordingly, interest on such deposits will also qualify for the deduction under this provision, along with incomes derived from the financial assets already listed therein. Finance (No. 2) Act, 1971 14. The changes set forth in the preceding paragraph will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Imposition of restraints on business expenses so as to reduce income disparities Finance (No. 2) Act, 1971 Expenditure on payment of salaries or provision of perquisites to employees 15. With a view to imposing restraints on business expenses so as to reduce income disparities, a provision has been made in a new sub-section (5) introduced in section 40A by section 10 of the Finance (No. 2) Act, 1971 placing certain ceiling limits on the deductible ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... one-fifth of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of his employment during the relevant accounting year, whichever is less. This provision has now been omitted from section 40 by section 9 of the Finance (No. 2) Act, 1971, and a modified provision has been incorporated in the new sub-section (5) of section 40A inserted by section 10 of the Finance (No. 2) Act, 1971. Under the new provision, the aggregate of expenditure incurred by an assessee in providing any perquisite, whether convertible into money or not, to an employee, and the amount of expenditure or allowance (such as depreciation allowance) in respect of assets of the assessee used by the employee for his own purposes or benefit, will not be allowed as deduction, in computing the profits of the business or profession, to the extent it exceeds 20 per cent of the amount of salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of employment of the employee in India during the relevant accounting year, whichever is less. For this purpose, the expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... employees. Finance (No. 2) Act, 1971 18. The ceiling limit over the deductible amount of expenditure in respect of salary and perquisites, etc., as explained above, will, however, not be applicable to the expenditure or allowance in relation to the following : 1. Any employee in respect of any period of his employment outside India. 2. Any employee being a foreign technician who is entitled to exemption from tax on his remuneration under section 10(6)(vii) or section 10(6)(viia). 3. Any employee whose income chargeable under the head "Salaries" does not exceed Rs. 7,500 per annum. Finance (No. 2) Act, 1971 19. In order to prevent the frustration of the new restrictions set forth in the preceding paragraphs by converting "contracts of service" into "contracts for service", it has been provided in a new sub-section (6) of section 40A that expenditure incurred by an assessee in payment of fees for services rendered by a person, who at any time during the 24 months immediately preceding the relevant accounting year was his employee, will not be allowed as a deduction in computing the taxable profits of the assessee to the extent it exceeds Rs. 60,000 in a year. In a case where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovided for his use, shall not exceed Rs. 72,000 for the year. This provision will be relevant in a case where an individual is a director, etc., of the company for a part of the year and a mere employee (or former employee) for the remainder of the year, and the aggregate ceiling calculated under sections 40(c) and 40A(5) with reference to the number of months or part of months comprised in the two periods adds up to more than Rs. 72,000 for the year. Finance (No. 2) Act, 1971 22. A consequential amendment to section 58 by section 12 of the Finance (No. 2) Act, 1971 has omitted the reference to section 40(a)(v) in section 58(1)(a)(iv). The amended provisions of section 40(c) and also the new provisions in section 40A(5) and (6) will apply in computing the income chargeable under the head "Income from other sources", by virtue of the existing provisions in section 58(1)(b) and section 58(2). Finance (No. 2) Act, 1971 23. The provisions set forth in paragraphs 15 to 22 above will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it. Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te of Rs. 50, specified against (ii) of the said sub-rule, has been reduced to Rs. 40. In respect of the period spent by the employee or other person (outside his headquarters) at Bombay, Calcutta or Delhi, the reduced limits over the deductible amount of daily allowance will be Rs. 120 and Rs. 60 respectively. The reduced rates will take effect from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73, i.e., in respect of current incomes of the financial year 1971-72 or other accounting period corresponding to it. Measures for rationalisation of certain provisions of income-tax law Finance (No. 2) Act, 1971 Development rebate 26. The Income-tax Act provides for the grant of a deduction by way of development rebate on machinery and plant installed for the purpose of the business, in computing the taxable profits of the business. This deduction has been in force since 1955 and is designed to enable industry to generate internal finances for replacement of machinery and equipment in a period of rising costs and increasing sophistication. The rates of development rebate currently in force are : New ships 40 per cent of the actual cost. New machinery and plant in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory corporations established by a Central, Provincial or State enactment, such as road transport corporations, air transport corporations, etc., have been declared to be companies. Foreign corporations in which the capital is held wholly or partly by a foreign Government have also been declared as "companies" for the purposes of income-tax, where such corporations are legal entities separate from the Government and are capable of holding property independently and of suing and being sued according to the laws of that country. The provision has also been used, on a few occasions, to confer the status of company on bodies such as chambers of commerce, clubs, etc., even though these bodies do not possess the ordinary characteristics of a company limited by shares. The declaration under this provision has been given in some cases with retrospective effect to cover past years as well. Finance (No. 2) Act, 1971 30. The requirement that a foreign company could be treated as a company for purposes of the Income-tax Act only if it has been declared as a company by the Board generates unnecessary work. Further, giving retrospective effect to declarations made in the case of foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... angements for the declaration and payment of dividends within India. This position sometimes results in unintended difficulties both as regards the rates of tax applicable to the corporation's income and also its eligibility to some of the tax concessions, such as the export markets development allowance, which are available only to domestic companies. The definition of "Indian company" in section 2(26) has, therefore, been amended by section 3(c) of the Finance (No. 2) Act, 1971 so as to cover statutory corporations established in India as also any institution, association or body which is declared by the Board to be a company under section 2(17) and which has its principal office in India. Finance (No. 2) Act, 1971 Definition of "a company in which the public are substantially interested" 32. The Income-tax Act makes a distinction in tax treatment as between a widely-held domestic company (i.e., a domestic company in which the public are substantially interested) and a closely-held domestic company (i.e., a domestic company in which the public are not substantially interested). Closely-held companies are required (subject to certain exceptions) to distribute dividends up to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ection will be made by the Board having regard to the object of the company, the nature and composition of its membership and other relevant considerations. The Board is empowered to issue such direction even in respect of a past year and the direction will have effect for the assessment year or years specified therein. Finance (No. 2) Act, 1971 35. The amendment to clauses (17), (18) and (26) of section 2 explained in paragraphs 29 to 34, have taken effect from 1-4-1971. Finance (No. 2) Act, 1971 Computation of a partner's share in the income of a firm, and the tax payable by him, where an unregistered firm is assessed as a registered firm 36. A partnership firm enjoys a concessional tax treatment if it is "registered" for purposes of the Income-tax Act. While in the case of an unregistered firm, income-tax is payable on the total income of the firm at the progressive rates of tax applicable in the case of individual. Hindu undivided families, associations of persons, etc., a registered firm pays tax on its income at lower rates and the partners of the firm are chargeable to tax in respect of their shares in the profits of the firm. Under section 183(b) the Income-tax Offic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income of a firm, has been amended by section 13 of the Finance (No. 2) Act, 1971 in order to provide that in computing the partner's share in a case where an unregistered firm is assessed as a registered firm, the tax payable by the firm on its total income will be allowed as a deduction. This provision will place an unregistered firm which is assessed as a registered firm, and its partners, on a par with a registered firm and its partners in the matter of income-tax. Finance (No. 2) Act, 1971 39. Under section 86(iii), in the case of a partner in an unregistered firm, no income-tax is payable by him in respect of any portion of his share in the profits of the firm on which income-tax is payable by the firm. In the context of the change in the provisions of section 183(b) and the provision in the Finance (No. 2) Act, 1971 for levy of tax on the total income of an unregistered firm assessed as a registered firm at the same rates as in the case of a registered firm, section 86(iii) has been amended by section 24 of the Finance (No. 2) Act, 1971 in order to make it clear that in the case of a partner of an unregistered firm which is treated as a registered firm, the partner will b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is brought about by allowing a deduction of a specified percentage of the dividends in computing the taxable income of the company receiving the dividends, and taxing the remainder at the rate of tax applicable to the ordinary income of the company. Under section 80M, before its amendment by the Finance (No. 2) Act, 1971, the deduction was : a. in respect of dividends received by a domestic company from any other domestic company, 60 per cent of such dividends; b. in respect of dividends received by a foreign company from a domestic company; i. where the company paying the dividend is a closely-held Indian company mainly engaged in a priority industry, 80 per cent of the dividends; ii. in any other case, 65 per cent of the dividends. As a result of this deduction, the effective rate of tax on the dividends works out to 22 per cent [55 per cent of 40 per cent] in the case of a widely-held domestic company which is liable to tax on its income at the rate of 55 per cent; and 26 per cent [65 per cent of 40 per cent] in the case of a closely-held domestic company, which is not an industrial company, where the rate of tax on the ordinary income is 65 per cent. In the case ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of a company on that part of the dividend on their shares which is attributable to the paying company's agricultural income which has been subjected to agricultural income-tax under a State law. The quantum of the relief is the proportionate amount of the agricultural income-tax borne by the company on its profits, but limited to the amount of Central income-tax payable by the shareholder, on that part of the dividend which is attributable to the profits of the company assessed to agricultural income-tax. In the case of shareholder other than a company, the relief was further limited to an amount calculated at 27.5 per cent on that portion of the dividend which is attributable to the profits of the company assessed to agricultural income-tax. Finance (No. 2) Act, 1971 46. The provisions referred to in the preceding paragraph was contrary to the concept underlying the present scheme of taxation of companies and their shareholders, under which no part of the Central income-tax borne by the company on its income is considered as having been paid on behalf of the shareholders. So far as the shareholder is concerned, the proximate source of the dividend is the investment in the shar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1].Under rule 19A, as amended by the said Notification, all borrowed moneys, whether by way of debentures, long-term borrowings or otherwise, will be excluded in computing the capital employed in a new industrial undertaking or ship or hotel. This amendment will come into force on 1-4-1972 and will, accordingly, apply in relation to the assessment year 1972-73 and subsequent years. Measures for achieving certain economic objectives Finance (No. 2) Act, 1971 Local authorities deriving income from supply of water and electricity outside their jurisdictional areas 49. Under section 10(20), before its amendment by the Finance (No. 2) Act, 1971, a local authority was exempted from tax on its income under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other sources", as also on its income from a trade or business carried on by it which accrues or arises from the supply of a commodity or service within its own jurisdictional area. Income derived by a local authority from the supply of a commodity or service outside its own territorial limits was, however, liable to tax. In order to encourage local authorities to supply drinking water an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al corporations to build up their internal resources at a fast rate, section 36(1)(viii) has been amended by section 8 of the Finance (No. 2) Act, 1971 so as to extend to such corporations the same tax concession as has been available to financial corporations engaged in providing long-term finance for industrial development in India. Accordingly, a financial corporation which is engaged in providing long-term finance for agricultural development in India will be entitled to a deduction, in the computation of its profits, of amounts carried to a special reserve account out of its current profits. The quantum of the deduction will be the same as under the existing provision, namely, up to 25 per cent of current profits in the case of a financial corporation having a paid-up capital not exceeding Rs. 3 crores, and up to 10 per cent of the current profits in any other case. The aggregate of the deductions on this account over a period of years will not, however, exceed the amount of the paid-up capital. The concession in these cases will also be subject to the requirement of approval of the corporation by the Central Government. The above provision will be effective from 1-4-1972 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Finance (No. 2) Act, 1971 55. The existing requirement, under section 80MM, relating to approval by the Central Government of agreements under which the technical know-how or technical services are provided, has, in actual practice, led to certain avoidable difficulties to taxpayers. The power of granting approval, for the purpose of the tax concession, has, accordingly, been vested in the Central Board of Direct Taxes. Finance (No. 2) Act, 1971 56. The amendments to section 80MM take effect from 1-4-1972 and will, accordingly, apply to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been provided that the approval of the Board will not be necessary in the case of agreements which are approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the applications for such approval pending with the Central Government immediately before that date will stand transferred to the Board for disposal. Finance (No. 2) Act, 1971 Dividends on shares in a foreign company allotted in consideration of the provision of technical know-how or technical services 57. Under section 80N, an Indian company deri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose by the Central Government before 1-4-1972 and that the applications pending with the Central Government on that date will stand transferred to the Board for disposal. The amendment of section 80A, as explained in paragraph 54, will apply also in relation to the deduction under section 80N. Finance (No. 2) Act, 1971 Royalties, commission, fees, etc., for provision of technical know-how or technical services to foreign enterprises 60. Under section 80-O, an Indian company deriving income by way of royalties, commission, fees etc., from a foreign company, in consideration of the provision to the foreign company of technical know-how or technical services is exempted from taxation in India on the whole of such income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided is approved by the Central Government before 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... operation of the provision in section 80-O, the power to accord approval to the agreement under which the technical know-how or technical services are provided has been vested in the Central Board of Direct Taxes instead of the Central Government. Further, the requirement that the approval to the agreement should be obtained before 1st October of the relevant assessment year has been replaced by the requirement that the application for the grant of such approval should be made to the Board before that date. The date on which the approval is actually granted will, therefore, no longer be material if the relevant application is made within the time allowed. Finance (No. 2) Act, 1971 64. The amended provisions of section 80-O will be operative from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the app ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icer of the Central or State Government, including an Income-tax Officer, who is authorised by the Central Government to exercise the functions as such, the appeal generally lies to the Revenue Commissioner having jurisdiction over the district concerned. Where, however, the Tax Recovery Officer is a State Government officer other than a Collector or an Additional Collector, the appeal lies to the revenue authority to which an appeal or application for revision would ordinarily lie if the order passed by the officer were an order under the law relating to land revenue or other public demands of the State concerned. In practical terms, this means that where the Tax Recovery Officer is a Tehsildar or a Mamlatdar, an appeal against his order in certain States lies to the Collector of the district. Finance (No. 2) Act, 1971 67. In view of the position that the tax recovery work has been taken over practically in its entirety by officers of the Income-tax Department, the rules in the Second Schedule have been amended by section 29 of the Finance (No. 2) Act, 1971 in order to provide that an appeal from an original order passed by a Tax Recovery Officer, not being an order which is co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Second Schedule]. 2. Every Tax Recovery Commissioner shall have the powers of a civil court while trying a suit for the purpose of receiving evidence, administering oaths, enforcing attendance of witnesses and compelling production of documents [vide rule 83 of the Second Schedule]. 3. Tax Recovery Commissioners will have the power to review the orders passed by them under the Second Schedule for the purpose of rectifying any mistake apparent from the record [vide rule 87 of the Second Schedule]. Finance (No. 2) Act, 1971 69. The power of the Board to make rules for regulating the procedure to be followed by Tax Recovery Officers, etc., has been enlarged in order to enable the Board to make rules for regulating the procedure to be followed by Tax Recovery Commissioners and to define the areas within which Tax Recovery Commissioners may exercise jurisdiction [vide rule 92 of the Second Schedule]. Finance (No. 2) Act, 1971 70. The amendments set forth in paragraphs 67 to 69 will take effect from 1-1-1972. Finance (No. 2) Act, 1971 Bar on registration of transfer of immovable property in a case where taxation liabilities remain unsatisfied 71. Section 230A, before it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned and also on the Income-tax Department, without any significant advantage to the Revenue. Under the new provision, the Board will be required to record the reasons for exempting any institution, etc., from the requirement of obtaining a tax clearance certificate.] Finance (No. 2) Act, 1971 72. The amendments to section 230A take effect from 1-10-1971. MEASURES FOR GRANTING TAX RELIEF AND REMOVING CERTAIN ANOMALIES AND PRACTICAL DIFFICULTIES Finance (No. 2) Act, 1971 Capital gains derived by charitable and religious trusts 73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As "income" includes "capital gains", a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated. Finance (No. 2) Act, 1971 76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mencement of the Income-tax Act and, therefore, places the concession already allowed under executive orders on a legal footing right from the date from which the requirement of application, by charitable or religious trusts, of at least 75 per cent of their income to charitable or religious purposes during the year of accrual of such income was introduced in the income-tax law. Finance (No. 2) Act, 1971 Forfeiture of exemption from income-tax on the income of charitable or religious trusts in certain cases 79. The Finance Act, 1970 made certain amendments in the scheme of tax exemption of charitable and religious trusts, inter alia, to curb the use of the funds of such trust to acquire control over industry and business. Under the provision in section 13(2)(h), a charitable or religious trust forfeits exemption from tax, if any, of the funds of the trust are, or continue to remain, invested for any period during the previous year in any concern in which the author, founder or contributor has a substantial interest. Since the expression "funds of the trust" is wide enough to include not only the uninvested cash but also shares, stocks, securities, etc., forming part of its corp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal corpus settled on trust or represents a donation made to it in kind), the trust will forfeit the exemption from tax only in relation to the income arising from such investment and its remaining income will continue to be eligible for exemption from tax. This amendment has been made effective retrospectively from 1-4-1971, i.e., the date from which section 13 was substituted by a new section, and will, accordingly, apply in relation to assessments for the assessment year 1971-72 and subsequent years. Finance (No. 2) Act, 1971 Deduction for expenses on travelling to salaried taxpayers 82. Under section 16(iv), a salaried taxpayer owning a motor car, or a motor cycle, scooter or other moped and using it for the purposes of his employment, and also one who does not own any such conveyance but uses the public transport system for travelling for the purpose of employment, is entitled to standard deduction from his salary income to cover the expenditure incurred by him on such travelling, including maintenance of the conveyance and its wear and tear. For the assessment year 1971-72, the standard deduction for a motor car is Rs. 200 per month and for a motor cycle, scooter or other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llied pursuits e.g., catching, curing, processing, preserving, storing and marketing of fish, or the purchase of materials and equipment in connection therewith for the purpose of supplying them to their members. In order, however, to prevent any possible misuse of the tax concession by those for whom it is not intended, it has been provided, that the tax concession will be available only in the case of such of these co-operative societies as, under their rules and bye-laws, restrict the voting rights to members who constitute the labour force or actually carry on the fishing or other allied activities, the State Government and the co-operative credit societies that provide financial assistance to them. Finance (No. 2) Act, 1971 87. These provisions will take effect from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. Finance (No. 2) Act, 1971 Interest on deposits made by members with co-operative societies 88. Under section 194A, taxpayers other than individuals and Hindu undivided families are required to deduct income-tax at source from interest (other than "interest on securities") credited or paid by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Scheduled Tribes residing in specified areas in the north-eastern part of India are exempt from tax in respect of income arising to them in such areas and also in respect of income by way of dividends or interest on securities, whether arising within or outside such areas. Originally, this provision was not applicable in the case of Government servants. The exclusion of Government servants from the purview of the exemption was, however, held by the Supreme Court to be unconstitutional and, accordingly, the provision has since been modified through the Taxation Laws (Amendment) Act, 1970, so as to extend the tax concession to Government servants as well. For similar reasons, the tax concession available in the case of the generality of taxpayers in Ladakh district, has now been extended to Government servants who were resident there during 1961-62. This has been done with retrospective effect from the assessment year 1962-63. [The scope of the amendment has been explained in detail in Board's Circular No. 67, dated 23-9-1971.] AMENDMENTS TO WEALTH-TAX ACT Finance (No. 2) Act, 1971 Increase in the rates of ordinary wealth-tax in the case of individuals and Hindu undivided fami ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above (col. 3) is lower than the amount arrived at by applying the rate of one per cent to the whole of the net wealth (col. 2). On the other hand, when the net wealth amounts to Rs. 1,11,200, wealth-tax at the rate of 1 per cent of the entire wealth is lower than the amount calculated by applying the marginal provision. Hence, in the case of an individual, the marginal provision ceases to be applicable from this level upward. In the case of a Hindu undivided family, there will be a similar margin immediately above Rs. 2,00,000, in which the tax calculated at 10 per cent of the excess of the net wealth over Rs. 2,00,000 will be less than that calculated at the rate of 1 per cent on the entire net wealth. Finance (No. 2) Act, 1971 92. The rates of additional wealth-tax on lands and buildings situated in urban areas continue without change. The increases in the rates of ordinary wealth-tax as explained in the preceding paragraph will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years. A consequential amendment has also been made by section 33 of the Finance (No. 2) Act, 1971 to section 18 relating to penalties for failu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) otherwise than for adequate consideration, or (c) to any person or association of persons, otherwise than for adequate consideration, for the immediate or deferred benefit of the individual himself, his or her spouse or minor child (not being a married daughter) or both; or (d) to a person or association of persons otherwise than under an irrevocable transfer. Transfers made in these cases prior to 1-4-1956, are outside the scope of this provision. Transfer of assets in regard to which gift-tax is chargeable, or which are specifically exempt from the charge of gift-tax under section 5 of the Gift-tax Act, for the assessment year 1964-65 or any subsequent assessment year, are also outside the scope of this provision. This latter provision was introduced in the Wealth-tax Act in the context of the increases made under the Finance Act, 1964 in the rates of gift-tax. As the rates of gift-tax at present applicable on gifts up to Rs. 20,00,000 are considerably lower than those prevailing under the Finance Act, 1964 and the incidence of wealth-tax has also been substantially increased, section 31(a)(i) of the Finance (No. 2) Act, 1971 has amended section 4 of the Wealth-tax Act so as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rate property into joint family property of a Hindu undivided family of which he is a member, by impressing such property with the character of joint family property or by throwing such property into the common stock of the Hindu undivided family, he will be deemed to have transferred the converted property through the family to the members of the family for being held by them jointly. The share in the converted property in so far as it is attributable to the interest of the individual, his spouse or minor children (other than married daughters) will be included in the net wealth of the individual. Further, in the event of a partial or total partition in the Hindu undivided family, the shares allotted to the spouse or minor children in the converted property will also be similarly included in the net wealth of the individual. Finance (No. 2) Act, 1971 97. The amendment explained in the preceding paragraph will take effect from 1-4-1972 and will, accordingly, be applicable for the assessment year 1972-73 and subsequent assessment years. However, the provision will apply in relation to conversions of separate property into joint Hindu family property effected after 31-12-1969 which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a house building scheme of the society will be regarded as the owner of that building or part for purposes of wealth-tax. It has also been provided that in determining the value of such building or part for purposes of inclusion in the net wealth the value of any outstanding instalments of the amount payable by the member of the society to the society towards the cost of such building or part (including the land appurtenant thereto) under the house building scheme of the society will be deducted as a debt owed by him in relation to such building or part. Accordingly, the value of the house or flat for wealth-tax purposes will be taken to be the difference between the market value of the flat if it were free from any encumberance and the discounted value of outstanding instalments of the amount payable by him to the society towards the cost of the building or flat. As the member will be considered as the owner of such house or flat, he will also become entitled to the exemption in respect of one house up to the value of Rs. 1,00,000 in the computation of his net wealth, under section 5(1)(iv) as amended by the Finance (No. 2) Act, 1971 [vide paragraph 94 of this circular]. Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted from the Act, jewellery should not at all qualify for exemption from wealth-tax. Finance (No. 2) Act, 1971 103. With a view to bringing out this intention clearly and implementing the purpose underlying the withdrawal of exemption from jewellery altogether from wealth-tax from the assessment year 1963-64, clause (viii) of section 5(1) has been amended by section 32 of the Finance (No. 2) Act, 1971, retrospectively, from 1-4-1963, so as to exclude jewellery altogether from the purview of that clause. Further, the term "jewellery" has been given an extended meaning prospectively so as to include: a. ornaments made of gold, silver, platinum, or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone and whether or not worked or sewn into any wearing apparel; and b. precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel. Finance (No. 2) Act, 1971 104. Further, under the amendment, the operation of the exemption in clause (viii) has been restricted prospectively in the following respects : 1. Furnit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The extended meaning of the term "jewellery" as stated in paragraph 103, as also the exclusion of furniture, utensils and other articles referred to in item (a) and the limitation of the exemption in respect of conveyances to Rs. 25,000, as stated in item (b) of paragraph 104, will become effective from 1-4-1972, i.e., for the assessment year 1972-73 and subsequent assessment years. Finance (No. 2) Act, 1971 Shares in new industrial companies 107. Clause (xx) of section 5(1), before its amendment by the Finance (No. 2) Act, 1971, exempted from wealth-tax the value of shares held by the assessee in any company established with the object of carrying on an industrial undertaking in India, where such shares formed part of the initial issue of equity share capital made by the company after 31-3-1964. The exemption is available for a period of 5 years commencing with the assessment year next following the date on which such company commences the operations for which it has been established. In the context of the improved climate for new equity issues of industrial companies, this exemption has been withdrawn in respect of shares forming part of an initial issue of equity share capi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ption in respect of investments in specified financial assets as explained in the preceding paragraph has been available also to a discretionary trust which is chargeable to tax on its net wealth at the flat rate of 1½ per cent or at the rates applicable in the case of an individual, whichever is higher. As this is not in consonance with the intention underlying the provision made last year for the taxation of discretionary trusts in this manner, section 21(4) has been amended by section 34 of the Finance (No. 2) Act, 1971 so as to withdraw the exemption in respect of these items of financial assets in computing the net wealth of a discretionary trust. However, it has been specifically provided that the exemption in respect of these assets will continue to be available in the case of discretionary trusts referred to in the proviso to section 21(4), that is to say— a. a testamentary trust; b. a non-testamentary trust created before 1-3-1970 bona fide for the benefit of the relatives of the settlor or members of the Hindu undivided family which created the trust, where such relatives or members were mainly dependent on the settlor for their support and maintenance; c. provident fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 2(xxiv), the expression "transfer of property" has also been given an extended meaning so as to cover certain transactions which would not ordinarily be comprised within that term, it was held by the Supreme Court in the case of Goli Eswariah v. CGT [1970] 76 ITR 675 that the act of conversion of separate property by a coparcener of a Hindu undivided family into property belonging to the family did not fall within the normal or even the extended meaning of the term "transfer of property" under the Gift-tax Act and hence, such an act of conversion of separate property into Hindu undivided family property did not attract liability to gift-tax. Finance (No. 2) Act, 1971 113. With a view to closing this loophole for avoidance of gift-tax liability by using the device of converting self-acquired property into Hindu undivided family property, section 37 of the Finance (No. 2) Act, 1971 has amended sections 2 and 4 for the purpose. Under the amendment to section 4, it has been provided that where a member of a Hindu undivided family converts his separate property into joint family property, he shall be deemed to have made a gift, in favour of the family, of so much of that property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pect of a part of its income which arises from investments made in a concern in which the founder of the institution or fund or his relatives have a substantial interest, where the aggregate of the funds invested by the institution or fund in such a concern does not exceed 5 per cent of the capital of that concern. This amendment has been made retrospective from 1-4-1971 and, accordingly, applies for the assessment year 1971-72 and subsequent years. Finance (No. 2) Act, 1971 Recovery of arrears of gift-tax 115. Section 33 applies for purposes of gift-tax the provisions of the Income-tax Act relating to recovery of arrears of income-tax. In the context of the amendment made in the Income-tax Act so as to vest in Tax Recovery Commissioners jurisdiction to hear appeals against orders of Tax Recovery Officers, a consequential amendment has been made in section 33 by section 37(d) of the Finance (No. 2) Act, 1971 so as to vest such jurisdiction in respect of orders passed by Tax Recovery Officers in the course of recovery proceedings relating to gift-tax as well. This amendment will take effect from 1-1-1972 from which date the corresponding amendments to the Income-tax Act will also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... text of the amendments made in the Income-tax Act so as to vest in Tax Recovery Commissioners jurisdiction to hear appeals against the orders of Tax Recovery Officers, section 38 of the Finance (No. 2) Act, 1971 has made a consequential amendment to section 18 so as to vest such jurisdiction in respect of appeals in proceedings relating to recovery of surtax as well. This amendment will take effect from 1-1-1972 from which date the corresponding amendments to the Income-tax Act also come into effect. Miscellaneous Provisions Finance (No. 2) Act, 1971 Deposit Insurance Corporation 120. The Deposit Insurance Corporation was set up under the Deposit Insurance Corporation Act, 1961, and came into existence on 1-1-1962. Under section 30 of that Act, the Corporation was exempted from taxation on its income for an initial period of 5 years covering its profits up to 31-12-1966. This period was extended by 5 years, i.e., to cover profits of the Corporation up to 31-12-1971, by an amendment of section 30 through the Finance (No. 2) Act, 1967. Finance (No. 2) Act, 1971 121. The Corporation has now embarked on an ambitious scheme of extending the coverage of insurance to the co-operati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount by which the total income exceeds Rs. 5,000 (3) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000 Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000 ; (4) where the total income exceeds Rs. 15,000 but does not exceed; Rs. 20,000 Rs. 1,350 plus 23 per cent of the amount by which the total income exceeds Rs. 15,000; (5) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000 Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000; (6) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000 Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000; (7) where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000 Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000 ; (8) where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000 Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000 ; (9) where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000 Rs. 23,000 plus 70 per cent of the amount by which the total income ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 000 4 per cent of the amount by which the total income exceeds Rs. 10,000; (3) where the total income exceeds Rs. 25,000 but does not exceed Rs. 50,000 Rs. 600 plus 6 per cent of the amount by which the total income exceeds Rs. 25,000 ; (4) where the total income exceeds Rs. 50,000 but does not exceed Rs. 1,00,000 Rs. 2,100 plus 12 per cent of the amount by which the total income exceeds Rs. 50,000 ; (5) where the total income exceeds Rs. 1,00,000 Rs. 8,100 plus 20 per cent of the amount by which the total income exceeds Rs. 1,00,000. Surcharges on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of surcharges for purposes of the Union calculated as specified hereunder : (a) in the case of a registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income, a surcharge calculated at the rate of ten per cent of the amount of income-tax computed at the rate hereinbefore specified; (b) in the case of any other registered firm, a surcharge calculated at the rate of twenty per cent of the amount of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eds Rs. 50,000 shall not exceed the aggregate of— (a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company); and (b) eighty per cent of the amount by which its total income exceeds Rs. 50,000. II. In the case of a company other than a domestic company— (i) on so much of the total income as consists of— (a) royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1961, or (b) fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th day of February, 1964. and where such agreement has, in either case been approved by the Central Government 50 per cent ; (ii) on the balance, if any, of the total income - 70 per cent. ANNEXURE II RATES OF INCOME-TAX FOR DEDUCTION OF TAX AT SOURCE FROM "SALARIES" AND RETIREMENT ANNUITIES AND FOR COMPUTING "ADVANCE TAX" PAYABLE DURING THE FINANCIAL YEAR 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... least two members entitled to claim partition who are not less than eighteen years of age, or (b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family, (i) no income-tax shall be payable on a total income not exceeding Rs. 7,000, (ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000. Surcharges on income-tax The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased by a surcharge for purposes of the Union calculated at the following rates, namely :— (a) in a case where the total income does not exceed Rs. 15,000 - 10 per cent ; (b) in any other case -15 per cent : Provided that the amount of surcharge payable shall, in no case, exceed the aggregate of the following sums, namely : (i) an amount calculated at the rate of 10 per cent on the amount of income-tax on an income of Rs. 15,000 if such income had been the total income (the income of Rs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rge calculated at the rate of fifteen per cent on the aggregate of the following amounts, namely : (i) the amount of income-tax computed at the rate hereinbefore specified; and (ii) the amount of the surcharge calculated in accordance with clause (a), or, as the case may be, clause (b) of this sub-paragraph. Explanation: For the purposes of this paragraph "registered firm" includes an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-tax Act. 4. In the case of every local authority Rate of income-tax On the whole of the total income - 50 per cent. Surcharge on income-tax The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.B. Companies 1. In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956,— Rates of income-tax (i) on that part of its total income which consists of profits and gains from life insurance business 52.5 per cent ; (ii) on the balance, if any, of the total income the rate of income-tax applicable, in accordance with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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