TMI BlogThe Finance Act, 1978--Explanatory Notes on the provisions relating to direct taxesX X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Act; and the rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases during the financial year 1978-79. (ii) Amendment of the Income-tax Act, 1961, with a view to widening the area of tax incentives for savings; providing greater tax incentive for savings in specified forms; liberalising the scope of certain concessions for promoting construction of houses, particularly for persons in the low and middle income brackets; placing a curb on extravagant and wasteful expenditure in businesses and professions; and a few other matters. (iii) Amendment of the Interest-tax Act, 1974, with a view to discontinuing the levy of interest-tax. (iv) Amendment of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, with a view to increasing the rates of compulsory deposit and making certain consequential changes. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax for the assessment year 1978-79. 3.1 The rates of income-tax for the assessment year 1978-79, in the case of all categories of taxpayers (corporate as well as non-corporate) are specified in Part I of the Schedule to the Finance Act. These rates are the same a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year 1978-79, tax will be deductible at the rate of 34.5 per cent. made up of basic income-tax of 30 per cent. and surcharge of 4.5 per cent. (being 15 per cent. of the income-tax). In view of a specific provision made in new section 194BB of the Income-tax Act, income-tax will be deductible at source only where the income by way of winnings from any horse race to be paid to a person exceeds Rs. 2,500. It is also provided in that section that no deduction will be made from such winnings where the payment is made before 1st June, 1978. 4.3 The provisions of the new section 194BB of the Income-tax Act have been explained in paragraph 25 of this Circular. (iii) Rates for deduction of tax at source from "Salaries", computation of "advance tax" and charging of income-tax in special cases during the financial year 1978-79. 5.1 The rates for deduction of tax at source from "Salaries" in the case of individuals during the financial year 1978-79, and for the computation of advance tax payable during that financial year in the case of all categories of taxpayers have been specified in Part III of the Schedule to the Finance Act. These rates are also applicable for deduction of income-t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the case of Indian citizens employed outside India--Section 6(1).--Clause (1) of section 6 of the Income-tax Act provides that an individual is said to be resident in India in any previous year, if- (a) he is in India in that year for a period or periods amounting in all to 182 days or more; or (b) he maintains or causes to be maintained for him a dwelling place in India for a period or periods amounting in all to 182 days or more in that year and has been in India for thirty days or more in that year; or (c) having within the four years preceding that year been in India for a period or periods amounting in all to 365 days or more, he is in India for a period or periods amounting in all to sixty days or more in that year. The Finance Act has inserted an Explanation below the said clause (1) to secure that, in the case of an Indian citizen, who is rendering service outside india and who is or has been in India on leave or vacation in the previous year, the period of "thirty days" and "sixty days" respectively referred to in (b) and (c) above would stand extended to ninety days. The effect of this provision will be that Indian citizens employed outside India would be able to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 10,000 are regarded as low-paid employees. The initial depreciation allowance in respect of such buildings is allowed at the rate of 20 per cent. of the actual cost thereof. The Finance Act has raised the rate of initial depreciation allowance in respect of such buildings from 20 per cent. to 40 per cent. 9.2 This amendment will take effect from 1st April, 1979, and will accordingly, apply in relation to the assessment year 1979-80 and subsequent years. [Section 5 of the Finance Act] 10.1 Modification of the scheme of export markets development allowance--Section 35B.--Domestic companies and non-corporate taxpayers resident in India are entitled to a weighted deduction in respect of the expenditure incurred by them on development of export markets, in accordance with the provisions of section 35B of the Income-tax Act. The Finance Act has made three modifications in the scheme of export markets development allowance which are explained hereunder. 10.2 The first modification is that no deduction will be allowed under section 35B in relation to any expenditure incurred after March 31, 1978, unless the following conditions are fulfilled:- (i) The domestic company or, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e following:- (a) advertisement or publicity outside India in respect of the goods, services or facilities dealt in or provided by the taxpayer in the course of his business; and (b) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit. 10.6 These amendments take effect from 1st April, 1978. However, as stated in paragraph 10.2 above, the aforesaid modifications will apply only in relation to expenditure incurred after 31st March, 1978. [Section 6 of the Finance Act] 11.1 Deduction in respect of payments to associations and institutions for carrying out rural development programmes--Section 35CCA.--With a view to encouraging companies and co-operative societies to involve themselves in the work of rural welfare and uplift, the Finance (No. 2) Act, 1977, had introduced a new section 35CC in the Income-tax Act under which companies and co-operative societies are entitled to a deduction, in the computation of their taxable pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (3C) and (3D) inserted in section 37 are as follows:- (a) The provision for the disallowance of a specified portion of such expenditure will apply only in relation to expenditure on advertisement, publicity and sales promotion in India. (b) Although this provision will apply to all categories of taxpayers carrying on any business or profession, no disallowance will be made in cases where the aggregate amount of such expenditure does not exceed Rs. 40,000. (c) Where a taxpayer has set up an industrial undertaking for the manufacture or production of any articles, no disallowance will be made under this provision in respect of expenditure on advertisement, publicity or sales promotion incurred by the taxpayer for the purposes of the business of such undertaking for three previous years, namely, the previous year in which such undertaking begins to manufacture or produce such articles and the two previous years immediately following that year. 12.2 The amount to be disallowed under this provision will be calculated as under:- i. where the aggregate expenditure on advertisement, publicity and sales promotion in India does not exceed ¼ per cent of the turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the aggregate of the number of copies of such newspaper circulated during the calendar year by the total number of days on which such newspaper was published in that year. The term "newspaper" is not confined to a "daily" newspaper, but would also cover periodicals and journals. 12.4 As the terms "publicity" and "sales promotion" have a wide amplitude, expenditure incurred by taxpayers on fashion shows; beauty contests; consumer gift offers; and free samples or gifts will fall within the ambit of new sub-section (3A) of section 37 of the Income-tax Act. 12.5 For the removal of doubts, it has been clarified that nothing contained in new sub-section (3A) shall apply in relation to expenditure in the nature of entertainment expenditure incurred by a taxpayer in connection with advertisement, publicity or sales promotion and such expenditure shall be governed by sub-section (2A) of section 37 which lays down certain ceiling limits for the allowance of such expenditure. 12.6 These provisions will take effect from 1st April, 1979, and will accordingly apply in relation to the assessment year 1979-80 and subsequent years. [Section 8 of the Finance Act] 13.1 Relaxation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Reserve Bank of India. In view thereof, the words" and the adequacy of the consideration so determined or approved is not questioned by the assessee" occurring in clause (b) of the proviso to section 52(2) of the Income-tax Act have been omitted retrospectively from 1st April, 1974. [Section 9 of the Finance Act] 14.1 Exemption of capital gain attributable to enhancement of compensation for compulsory acquisition of residential house property in certain circumstances--Section 54.--Section 54 of the Income-tax Act provides that where the capital gain arises from the transfer of a house property, which in the two years immediately preceding the date of transfer was being used by the assessee or a parent of his mainly for the purpose of his own or the parent's own residence (hereinafter referred to as the original asset), and the assessee has, within a period of one year before or after that date purchased, or within a period of two years after that date constructed, a house property for the purposes of his own residence (hereinafter referred to as the new asset), then, the capital gain will not be charged to tax, to the extent it has been utilised for the purchase or cons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 14.5 Where the assessee transfers the relevant asset within a period of three years from the date of its purchase or construction, then, for the purposes of determining the amount of capital gain arising from the transfer of the relevant asset (i) the cost of the relevant asset will be taken at nil, if the amount of the unadjusted capital gain exceeded the cost of the relevant asset; and (ii) the cost of the relevant asset will be reduced by the amount of the unadjusted capital gain, if such unadjusted capital gain was equal to or less than the cost of the relevant asset. In the result, the exemption of the unadjusted capital gain on the purchase or construction of the relevant asset would stand forfeited. 14.6 The expression "unadjusted capital gain" means (i) the recomputed capital gain (i.e., the amount of capital gain computed by taking the enhanced compensation as the full value of the consideration, as reduced by the amount not charged to tax under sub-section (1) of section 54; or (ii) the capital gain attributable to the enhancement of the compensation, whichever is less. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (2) of the Explanation to new sub-section (2) of section 54. The said clause (2) provides that in a case where the computation of capital gain, made with reference to the compensation which would have been payable had such enhancement not been made, results in a loss or does not result in any profits or gains chargeable to income-tax under the head "Capital gains", the capital gain attributable to the enhancement of the compensation will be the capital gain computed with reference to the enhanced compensation. In other cases, the capital gain attributable to the enhancement of the compensation will be the difference between (i) the capital gain as recomputed with reference to the enhanced compensation; and (ii) the capital gain computed with reference to the compensation which would have been payable if the enhancement had not been made. This may be illustrated by the following examples:- Example I Rs. Capital gain computed with reference to the compensation originally awarded (-)20,000 Recomputed capital gain 50,000 Hence, capital gain attributable to the enhancement of the compensation 50,000 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for such acquisition is enhanced by any court, tribunal or other authority, and the assessee has, within a period of two years after the date of receipt of the "additional compensation" purchased any land for being used for agricultural purposes (hereinafter referred to as the relevant asset), then, the "unadjusted capital gain" will not be charged to tax, to the extent it has been utilised for purchasing the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase of the relevant asset, only the excess amount will be chargeable to tax. 15.3 The provisions relating to forfeiture of the exemption in cases where the relevant asset is transferred by the assessee within a period of three years from the date of its purchase are in pari materia with the corresponding provisions in section 54(2), explained in paragraph 14.5 of this Circular. The terms "additional compensation", "unadjusted capital gain" and "capital gain attributable to the enhancement of the compensation" also have the same meaning as explained in paragraphs 14.6 to 14.8 of this Circular. 15.4 The above changes have been made with retrospective effect from 1st April, 1974, and will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tructing the relevant asset. Where the amount of the unadjusted capital gain exceeds the cost of purchase or construction of the relevant asset, only the excess amount will be chargeable to tax. 16.3 The provisions relating to forfeiture of the exemption in cases where the assessee transfers the relevant asset within a period of three years from the date of its purchase or construction are in pari materia with the corresponding provisions in section 54(2), explained in paragraph 14.5 of this Circular. The terms "unadjusted capital gain", "additional compensation" and "capital gain attributable to the enhancement of the compensation" have the same meaning as explained in paragraphs 14.6 to 14.8 of this Circular. 16.4 The above changes have been made with retrospective effect from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. [Section 12 of the Finance Act] 17.1 Modification of the provisions relating to exemption of "long-term capital gains" in cases where the consideration received or accruing as a result of the transfer is invested or deposited in specified assets--Section 54E.--Section 54E of the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anks and co-operative societies engaged in carrying on the business of banking (including co-operative land mortgage banks and co-operative land development banks) have been included as a specified asset. The Finance Act has inserted a new sub-section (1A) in section 54E to provide that fixed deposits made after 27th April, 1978 (i.e., the date on which the Finance Bill, 1978, was taken up for consideration by the Lok Sabha) will not qualify for purposes of exemption under that section unless the following conditions are fulfilled, namely:- (a) The assessee furnishes, along with the deposit, a declaration in writing to the bank or co-operative society with which such deposit is made to the effect that he will not take any loan or advance on the security of such deposit during a period of three years from the date on which the deposit is made. (b) The assessee furnishes, along with the return of income for the assessment year relevant to the previous year in which the transfer of the original asset was effected or within such further time as may be allowed by the Income-tax Officer, a copy of the declaration referred to in (a) above, duly attested by an officer not below the ran ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. 17.7 For the purposes of this provision, the expression "unadjusted capital gain" means so much of the recomputed capital gain (i.e., the capital gain computed with reference to the enhanced compensation or consideration) as bears to the whole of the recomputed capital gain the same proportion as the amount of additional compensation or consideration bears to the enhanced compensation or consideration. The expression "additional compensation", for this purpose, will have the meaning assigned to it in clause (1) of the Explanation to section 54(2) of the Income-tax Act, which has been explained in paragraph 14.8 of this Circular. The expression "additional consideration", in relation to the transfer of any capital asset the consideration for which was determined or approved by the Central Government or the Reserve Bank of India, means the difference between the amount of consideration for such transfer as enhanced by any court, tribunal or other authority and the amount of consideration which would have been payable if such enhancement had not been made. 17.8 New sub-section (4) inserted in section 54E provides for the forfeiture of exemption of the unadjusted capital gain in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amalgamated with the other company. The Finance Act has inserted a new sub-section (3) in section 72A to enable such companies to obtain an "advance ruling" in this regard from the specified authority. Under the new sub-section, where a company owning an industrial undertaking or a ship is proposed to be amalgamated with any other company, such other company may submit the proposed scheme of amalgamation to the specified authority. The specified authority would then examine the scheme and take into account all relevant facts to satisfy itself whether the conditions referred to in section 72A would be fulfilled if such amalgamation is effected in accordance with such scheme. The specified authority is also being authorised to indicate such modifications in the proposed scheme of amalgamation as it considers necessary. Where, after examining the scheme and taking into account all relevant facts, the specified authority is satisfied that the conditions referred to in section 72A will be fulfilled if such amalgamation is effected in accordance with such scheme (or in accordance with such scheme as modified in the manner indicated by it), the said authority would intimate to the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... qualify for tax relief. In the case of Hindu undivided families, long-term savings effected through insurance policies on the life of any member of the family qualify for tax relief. In the case of a taxpayer, being an association of persons or a body of individuals, consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, long-term savings through life insurance or deferred annuity policies (without cash option) on the life of any member of such association or body or on the life of any child of either member, as also through the Public Provident Fund, Unit-linked Insurance Plan and 10-Year and 15-Year Cumulative Time Deposit Accounts qualify for tax relief. 20.2 The tax relief, in all cases, is allowed by deducting the whole of the first Rs. 4,000 of the qualifying savings plus 50 per cent. of the next Rs. 6,000 plus 40 per cent. of the balance of such savings, in computing the taxable income of the taxpayer. Long-term savings qualify for the tax relief only to the extent that such savings do not exceed the ceiling limits laid down in this behalf. In the case of indiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... families; and (c) associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, who acquire any equity shares forming part of an "eligible issue of capital". Under this provision, such taxpayers will be entitled to a deduction, in the computation of their taxable income, of an amount equal to 50 per cent. of the cost of such shares to them. 21.2 The maximum amount of investment qualifying for deduction in a year will be limited to Rs. 10,000. Hence, where the aggregate cost of the shares purchased by a taxpayer in the previous year exceeds Rs. 10,000, the deduction will be allowed only with reference to the cost of such of the shares (the aggregate cost whereof does not exceed Rs. 10,000) as are specified by the taxpayer in this behalf. Where a taxpayer who has acquired certain shares in any previous year, pays the whole or a part of the amount, if any, remaining unpaid on such shares, within a period of six months from the end of that previous year, the amount so paid by him will be regarded as having been paid by the taxpaye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rchased the shares from a person who is specified as an "underwriter" in respect of the issue of such shares in pursuance of clause 11 of Part I of Schedule II to the Companies Act, 1956, and who has acquired such shares by virtue of his obligation as such underwriter. 21.5 The deduction allowed under this provision will be forfeited if the taxpayer sells or otherwise transfers these shares to any person within a period of five years from the date of their acquisition. In such cases, an amount equal to 50 per cent. of the cost of such shares shall be deemed to be the income of the taxpayer of the year in which the shares are so sold or transferred and charged to tax accordingly. For the purposes of the aforesaid provision, a taxpayer shall be regarded as having acquired any shares on the date on which his name is entered in relation to those shares in the register of members of the company. 21.6 Where a deduction is claimed and allowed to a taxpayer under this section with reference to the cost of any equity shares, the cost of such shares will not be taken into account for the purposes of exemption of capital gains under section 54E of the Income-tax Act. 21.7 Although this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cruing as a result of the transfer. This is, however, not feasible in most cases because the claim for additional compensation usually gets settled after many years, when the statutory period of limitation for revising the earlier computation of capital gains would have expired. 23.2 With a view to removing this difficulty, the Finance Act has inserted a new sub-section (7A) in section 155 of the Income-tax Act to enable recomputation of capital gains in cases where the transfer of the capital asset is by way of compulsory acquisition under any law or where the consideration for the transfer is determined or approved by the Central Government or the Reserve Bank of India and the compensation or, as the case may be, consideration for such transfer is enhanced or further enhanced by any court, tribunal or other authority. 23.3 The new sub-section (7A) provides that, in such cases, the computation or, as the case may be, computations made earlier shall be deemed to have been wrongly made and the Income-tax Officer shall recompute the capital gain arising from such transfer by taking the compensation or consideration as enhanced or further enhanced to be the full value of the consi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ectively from 1st April, 1974, and will accordingly apply in relation to the assessment year 1974-75 and subsequent years. The new sub-section (10B) relating to recomputation of capital gain in cases falling under section 54E will take effect from 1st April, 1978, and will accordingly apply in relation to the assessment year 1978-79 and subsequent years. [Section 19 of the Finance Act] 24.1 Exemption of interest on National Development Bonds from deduction of income-tax at source--Section 193.--With a view to channelising savings of workers and other employees into the national development effort, Government had last year insured the National Development Bonds. In order to avoid hardship to industrial workers and other employees in the lower income brackets from deduction of tax at source from the interest payable on these Bonds, the Finance Act has inserted a new clause (ib) in the proviso to section 193 of the Income-tax Act exempting such interest from the requirement of deduction of income-tax at source. 24.2 The amendment takes effect from 1st April, 1978. [Section 20 of the Finance Act] 25.1 Deduction of tax at source from income by way of winnings from hors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven though the net amount payable to the punter after adjustment of the losses debited to his individual account may be less than Rs. 2,500. (e) The expression "any horse race" occurring in section 194BB would, where the context so requires, include more than one horse race. In view thereof, winnings by way of jackpot and trebel pool would fall within the ambit of section 194BB. (f) The provisions for deduction of tax at source will, however, not apply to income by way of stake money. This is because "stake money", in common parlance, is not regarded as winnings from a horse race, but really constitutes the "prize money" received on a horse race by the owner thereof on account of the fact that the horse wins the race or stands second or in any lower position. (g) Part II of the Schedule to the Finance Act provides for the deduction of tax at source from such winnings at the rate of 34.5 per cent. (income-tax 30 per cent. plus surcharge 4.5 per cent.) in the case of resident non-corporate taxpayers. In the case of non-resident non-corporate taxpayers, tax will be deductible on the same basis as is currently applicable to income other than interest payable on a tax-free securit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manner laid down in section 209(1)(a) or, as the case may be, s. 209(1)(d)(i), that is, with reference to the last assessed income of the taxpayer, or the income returned by him for a later year on the basis of which self assessment tax has been paid by him under section 140A, if such returned income is higher. However, the taxpayer will have the option to pay a lower amount of advance tax if his current income, according to his own estimate, would be lower. In such cases, the taxpayer may, instead of sending a statement, send an estimate in lieu of such statement, giving an estimate of his current income and the advance tax payable thereon. A taxpayer who has not previously been assessed by way of regular assessment will have to send, as at present, an estimate of the advance tax payable by him with reference to his current income. (b) In the case of a taxpayer who has been previously assessed by way of regular assessment under the Income-tax Act, the statement or, as the case may be, estimate in lieu of statement referred to in (a) above will have to be sent to the Income-tax Officer before the date on which the first instalment of advance tax is due in the case of the taxpayer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e failed to furnish a statement of the advance tax payable by him in accordance with the provisions of section 209A(1)(a). In the cases referred to in (a) above, the penalty shall not be less than 10 per cent. but shall not exceed one and half times the amount by which the advance tax actually paid during the financial year immediately preceding the assessment year falls short of (i) 75 per cent. of the assessed tax as defined in section 215(5) or (ii) the amount which would have been payable by way of advance tax if the assessee had furnished a correct and complete statement in accordance with the provisions of section 209A(1)(a), whichever is less. In the cases referred to in (b) above, the penalty shall not be less than 10 per cent., but shall not exceed one and a half times of 75 per cent. of the assessed tax as defined in section 215(5). 26.5 The Finance Act has also made certain consequential changes in section 273 of the Income-tax Act to provide for levy of penalty under that section in cases where a person furnishes an estimate of advance tax payable by him under section 209A which he knew or had reason to believe to be untrue or where a person fails without reasonable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 70,000, 12 per cent. The Finance Act has raised the rate of compulsory deposit on the initial slab of Rs. 25,000, from 4 per cent. to 4-1/2 per cent. The existing slab of Rs. 25,001--70,000 has been split into two. While the rate on the new slab of Rs. 25,001--35,000 will be 11 per cent., the rate on the next slab of Rs. 35,001--70,000 will be 12-1/2 per cent. On the slab over Rs. 70,000, the rate has been raised from 12 per cent. to 15 per cent. 28.2 Amendment consequential to insertion of new section 209A.--The Finance Act has also made certain amendments in section 4(3) of the Compulsory Deposit Scheme (Income-tax Payers) Act, 1974, relating to the definition of the term "current income" and section 5 of the said Act relating to time for making compulsory deposit. These amendments are consequential to the insertion of new section 209A in the Income-tax Act. 28.3 Although the amendments to the Compulsory Deposit Scheme (Income-tax Payers) Act take effect from 1st April, 1978, it has been specifically provided that the modification in the rates of compulsory deposit will apply only in relation to compulsory deposits for the assessment year 1979-80 required to be made durin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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