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TMI BlogThe Finance Act, 1984-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 ..... ere of direct taxes relate to the following matters:- (i) Prescribing the rates of income-tax (including surcharge thereon) on incomes liable to tax for the assessment year 1984-85; the rates at which income-tax will be deductible at source during the financial year 1984-85 from interest (including interest on securities), dividends, salaries, insurance commission, winnings from lotteries and crossword puzzles, winnings from horse races and other categories of income liable to such deduction under the Income-tax Act; and the rates for computation of "advance tax" and charging of income-tax on current incomes in certain cases for the financial year 1984-85. (ii) Amendment of the Income-tax Act, 1961 with a view to providing for compulsory audit of accounts of certain persons carrying on business or profession; prohibition against taking or accepting certain loans and deposits in cash; tightening of provisions relating to furnishing of information in respect of properties held benami; imposition of restrictions on contribution by employers to non-statutory funds; levying of income-tax at maximum marginal rate in the case of charitable and religious trusts which forfeit tax exemptio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t III of the First Schedule to the Finance Act, 1983, an 'industrial company" was defined to mean a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the carriage, by road or inland waterways, of passengers or goods or in the construction of ships or in the execution of projects or in the manufacture or processing of goods or in mining. The said definition has now been incorporated in section 2(8)(c) of the Finance Act. 4.3 The Finance Act, 1983 had allowed companies required to pay advance tax during the financial year 1983-84 to make a deposit with the Industrial Development Bank of India in lieu of one-half of the amount of surcharge payable by them. The Finance Act, 1984 has made a provision that where a company has made a deposit during the financial year 1983-84 with the Industrial Development Bank of India under the Companies Deposit (Surcharge of Income-tax) Scheme, 1983 framed by the Central Government under section 2(7) of the Finance Act, 1983, and where the amount of deposit so made is equal to or exceeds one-half of the amount of surcharge on income-tax payable by it, the surcharge payable by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ociations of persons, bodies of individuals and artificial juridical persons have been specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Finance Act. These rates are lower than the rates as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Finance Act. The Table below gives the comparative rates of income-tax (a) as specified in Sub-Paragraph I of Paragraph A of Part I of the First Schedule to the Act, and (b) as specified in Sub-Paragraph I of Paragraph A of Part III of the First Schedule to the Act on various slabs of income. COMPARATIVE RATES ON VARIOUS SLABS OF INCOME IN THE CASE OF INDIVIDUALS, ETC. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., the old rates) Rates as specified in Part III of the First Schedule to the Finance Act (i.e., the new rates) Up to Rs.15,000 Nil Nil Rs. 15,001-20,000 25% 20% Rs. 20,001-25,000 30% 25% Rs. 25,001-30,000 35% 30% Rs. 30,001-40,000 40% 35% Rs. 40,001-50,000 40% 40% Rs. 50,001-60,000 50% 45% Rs 60,001-70,000 52.5% 45% Rs. 70,001-85,000 55% 50% Rs. 85,001-1,00,000 57.5% 50% Over Rs. 1,00,000 60% ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er section 10(30) of the Income-tax Act, the amount of subsidy received by a person who carries on the business of growing and manufacturing tea in India, from or through the Tea Board, under a scheme for replacement or replantation of tea bushes specified by the Central Government in the Official Gazette, is exempt from income-tax. 7.2 The Finance Act has enlarged the scope of this concession to include any subsidy received from or through the Tea Board under a scheme for rejuvenation or consolidation of areas used for cultivation of tea. This exemption will apply only if such scheme is specified in this behalf by the Central Government in the Official Gazette. 7.3 The amendment takes effect from 1st April, 1985 and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 3 of the Finance Act] (ii) Modification of the provisions relating to investment of funds by charitable and religious trusts and institutions. 8.1 Section 11(5) of the Income-tax Act lays down the forms and modes of investing or depositing the funds of charitable and religious trusts. With a view to providing a wider choice for investment of trust funds and also ope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s earning profits from the industrial undertaking after it has been re-established, re-constructed or revived. The cash benefit of this concession is, therefore, deferred until the industrial undertaking starts earning adequate profits. Thus, the provision in section 33B does not confer any significant benefit on the assessees. 9.3 In view of the aforesaid considerations and with a view to simplifying the tax law by reducing the number of tax concessions which are not essential, the Finance Act has inserted a proviso to section 33B of the Income-tax Act to the effect that no deduction will be allowed under the said section in relation to the assessment year 1985-86 and subsequent years. [Section 5 of the Finance Act] (iv) Capital expenditure on acquisition of land used for scientific research. 10.1 Under section 35(1)(iv) of the Income-tax Act read with section 35(2)(ia), any capital expenditure incurred by a taxpayer on scientific research related to the business carried on by him is allowed in full in computing the taxable profits of the business of the year in which such expenditure is incurred. Under the provision as worded, even the expenditure for acquisition of land to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ax Act, where a taxpayer, incurs any expenditure on scientific research under a programme approved in this behalf by the prescribed authority, a weighted deduction of one and one-fourth times the amount of such expenditure is allowed in computing the taxable profits. Expenditure of a capital nature for acquisition of land or building or construction of any building is not eligible for this deduction. 11.3 Experience has shown that an expenditure-linked concession for weighted deduction leads to a tendency to inflate expenditure. On this consideration and with a view to simplifying the tax law, the Finance Act has discontinued the tax concession under section 35(2A) and (2B) of the Income-tax Act in relation to the sums paid or, as the case may be, the expenditure incurred after 29th February, 1984. 11.4 The relevant amendments take effect from 1st April, 1984, and will, accordingly, apply in relation to the assessment year 1984-85 and subsequent years. [Sections 6(b) and 6(c) of the Finance Act] (vi) Withdrawal of agricultural development allowance. 12.1 Under section 35C of the Income-tax Act, a company or a co-operative society which uses the products of agriculture, animal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, expenditure incurred by a company on the provision of any remuneration or benefit or amenity to a director or person who has a substantial interest in the company or to a relative of the director or of such person, and expenditure or allowance in respect of any assets of the company which are used by such person for his own purposes or benefit, is not allowable as a deduction in computing the taxable profits of the company, to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. The aggregate of such expenditure and allowance is further subject to an overall ceiling limit of Rs. 72,000 in a year, in respect of any one director or person who has a substantial interest in the company or a relative of the director or of such person. Where such expenditure or allowance relates to only a part of a year, the monetary ceiling is the amount calculated at the rate of Rs. 6,000 per month or part of a month comprised in the period to which the expenditure or allowance relates. 14.2 Having regard to the guidelines issued by the Company Law Board in regard to managerial remuneration, the Finance Act has raised the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A(6) of the Income-tax Act as under:- (i) The monetary ceiling under section 40A(5) in respect of expenditure or payment of salary has been raised from Rs. 5,000 to Rs. 7,500 per month, that is, Rs. 90,000 per annum. (ii) In the case of a former employee, who ceases or ceased to be an employee of the assessee during the relevant previous year or any earlier previous year, the annual ceiling in respect of allowable expenditure on payment of salary has been raised from Rs. 60,000 to Rs. 90,000. 15.3 Expenditure incurred on payment of any salary to a research worker engaged in scientific research during any one or more of the three years immediately preceding the commencement of business, which is deemed under section 35(1)(i) of the Income-tax Act to have been laid out or expended in the previous year in which the business is commenced, is allowed as deduction, by virtue of the proviso to section 40A(5)(c)(i), to the extent it does not exceed Rs. 5,000 for each month or part thereof comprised in the period of employment during the previous year in which the business is commenced and in the period of his employment during which he was engaged in scientific research during the three ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a recognised provident fund or an approved gratuity fund or an approved superannuation fund or for the purposes of and to the extent required by or under any other law. 16.3 With a view to avoiding litigation regarding the allowability of claims for deduction in respect of contributions made in recent years to such trusts, etc., the amendment has been made retrospectively from 1st April, 1980. However, in order to avoid hardship in cases where such trusts, funds, etc., had before, 1st March, 1984, bona fide incurred expenditure (not being in the nature of capital expenditure) wholly and exclusively for the welfare of the employees of the assessee out of the sums contributed by him, such expenditure will be allowed as deduction in computing the taxable profits of the assessee in respect of the relevant accounting year in which such expenditure has been so incurred, as if such expenditure had been incurred by the assessee. The effect of the under-lined words will be that the deduction under this provision would be subject to the other provisions of the Act, as for instance, section 40A(5), which would operate to the same extent as they would have operated had such expenditure been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ard to the foregoing considerations, the Finance Act has inserted a new section 44AB in the Income-tax Act making it obligatory for a person carrying on business to get him accounts audited before the "specified date" by an "accountant" if the total sales, turnover or gross receipts in business for the previous year or years relevant to the assessment year 1985-86 or any subsequent assessment year exceed or exceeds forty lakh rupees. A person carrying on profession will also have to get his accounts audited before the "specified date", if his gross receipts in profession for a previous year or years relevant to any of the aforesaid assessment years exceed ten lakh rupees. The new provision also casts an obligation on such persons to obtain before the "specified date" a report of the audit in the prescribed form duly signed and verified by the "accountant" setting forth such particulars as may be prescribed by rules made in this behalf by the Central Board of Direct Taxes. 17.4 In cases where accounts are required to be audited by or under any other law (as in the case of companies and co-operative societies), it will suffice if the accounts are audited under such other law before ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion, in the computation of their taxable income, of an amount equal to 50 per cent. of the cost of such shares, subject to a maximum amount of investment of Rs. 20,000. 18.2 The tax deduction under this section was allowed to stimulate investment in certain categories of new equity shares. The Finance Act has amended section 80CC to provide that the reduction under the said section will not be available in respect of shares offered for subscription by the company after 31st March, 1987. [Section 12 of the Finance Act]. (xii) Withdrawal of deduction in respect of medical treatment of handicapped dependants. 19.1 Section 80D of the Income-tax Act provides for the allowance of a deduction in the computation of total income of individuals and Hindu undivided families resident in India with reference to the expenditure incurred on medical treatment (including nursing) of handicapped dependants, suffering from a physical or mental disability which a registered medical practitioner certifies has the effect of reducing such person's capacity for normal work or engaging in gainful employment. Under the existing provisions, the maximum allowable deduction is Rs. 4,800 in cases of hospit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on in respect of income from specified financial assets. 21.1 Under section 80L of the Income-tax Act, income derived by a taxpayer from investments in specified categories of financial assets is exempt up to an aggregate amount of Rs. 7,000. The financial assets specified for this purpose include shares in Indian companies, units in the Unit Trust of India and deposits with banking companies. 21.2 In addition, under a separate provision contained in the Unit Trust of India Act, 1963, a further deduction up to Rs. 3,000 is allowed in respect of income received on units of the Unit Trust of India. 21.3 The Finance Act has enlarged the list of specified financial assets to include deposits under such National Deposit Scheme as may be framed by the Central Government and notified by it in this behalf in the Official Gazette. 21.4 In addition to deposits with banking companies, clause (via) of sub-section (1) of section 80L provides exemption in respect of deposits with any bank established by or under any law made by Parliament if the bank is approved by the Central Government for the purposes of the said provision. A notification has been issued on 29-2-1984 approving the Industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny. 22.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Sections 16 and 33 of the Finance Act] (xvi) Modification of provision relating to deduction in respect of dividends received from certain foreign companies. 23.1 Section 80N of the Income-tax Act provides for a deduction in the computation of the total income of the whole of the income of an Indian company received by way of dividends on shares allotted to it in a foreign company in consideration for the provision of technical "know-how" or technical services rendered to such foreign company, subject to the fulfilment of the conditions specified in that section. 23.2 The aforesaid concession which has been on the statute book for nearly two decades was introduced primarily to stimulate the flow of technology from the country. As the flow of technology from the country now does not need fiscal support of this order, the Finance Act has amended section 80N to reduce the deduction from 100 per cent. to 50 per cent. of the dividend income. 23.3 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to frame rules for specifying the various categories of permanent disabilities for the purposes of this section. A person who is suffering from one of the specified disabilities will alone be eligible for the tax concession under this provision. In specifying the categories of permanent physical disabilities, the Board will have to take into account the nature of such disability and the effect such disability is likely to have on the capacity of the person suffering therefrom to engage in gainful employment or occupation. 25.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 19 of the Finance Act] (xix) Taxation of business profits of private trusts at maximum marginal rate of income-tax. 26.1 Trustees of a private trust are ordinarily not expected to carry on any business because, implicit in the nature of business is the possibility of incurring loss and no prudent trustee would risk the trust's property in business venture. However, it has come to notice that taxpayers are increasingly conducting business through the medium of private trusts. Such arrangements are entered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where the individual shares of the persons on whose behalf or for whose benefit such income or part is receivable are determinate or unknown.] However, the proviso to section 164(1) lays down that income received by discretionary trusts will not be charged to tax at the maximum marginal rate, but at the normal rates of tax applicable to individuals, association of persons, etc., in cases where any one of the following conditions is fulfilled, namely:- (i) none of the beneficiaries has any other income chargeable under the Income-tax Act exceeding the exemption limit or is a beneficiary under any other trust; (ii) the trust is declared by a person by will and such trust is the only trust so declared by him; (iii) the trust has been created before 1st March, 1970, by a non-testamentary instrument and the Income-tax Officer is satisfied that the trust was created bona fide exclusively for the benefit of the relatives of the settlor or where the settlor is a Hindu undivided family, exclusively for the benefit of the members of such family in circumstances where such relatives or members were mainly dependent on the settlor for their support and maintenance; (iv) the trust has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attern for such funds as laid down under the Income-tax Act. 28.3 Where the whole or any part of the income of a charitable or religious trust is not eligible for exemption or the trust forfeits tax exemption in the circumstances indicated at (a) to (c) of the preceding paragraph, tax is charged on such income under the rate schedule applicable to individuals, associations of persons, etc. As the initial slab of income up to Rs. 15,000 is exempt from tax under this Schedule a charitable or religious trust which forfeits tax exemption is not required to pay any tax if its income does not exceed Rs. 15,000. Even where the income exceeds Rs. 15,000 such excess is charged to tax at the graduated rates of tax applicable to individuals. 28.4 It has come to notice that attempts are being made to split certain large trusts into a number of smaller trusts in such a manner that the income of each such trust is either less than the exemption limit of Rs. 15,000 or the income falls for taxation only at the lower rates applicable to the initial slabs of income. As a result, forfeiture of tax exemption in the circumstances mentioned at (a) to (c) of paragraph 28.2 above does not have any deter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 21(b) and (c) of the Finance Act] (xxi) Relaxation of provisions relating to deduction of tax at source from interest on debentures and dividends up to specified limit. 29.1 Under section 193 of the Income-tax Act, income-tax is deductible at source on payment of any income chargeable under the head "Interest on securities". Section 194 of the Income-tax Act also provides for deduction of tax at source from income by way of dividends paid by an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India. 29.2 The requirement of deduction of tax at source from such income is dispensed with in certain circumstances, subject to the fulfilment of certain conditions, including procedural formalities, laid down in the law. With a view to avoiding paper work and inconvenience to small investors, the Finance Act has made certain modifications in the relevant provisions of the Income-tax Act. The effect of the modifications is that it will not be necessary to deduct t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in handling a large number of relatively smaller cases, the Finance Act has amended section 269C to raise the aforesaid monetary limit to Rs. 1,00,000. 31.3 Section 269F of the Income-tax Act lays down the procedure for hearing of objections by the competent authority before an order of acquisition may be made by him. One of the conditions to be fulfilled before any such order is made is that the competent authority must be satisfied that the fair market value of the immovable property to which the proceedings relate exceeds Rs. 25,000. As a logical corollary to the amendment of section 269C, the Finance Act has also raised the aforesaid monetary limit in section 269F to Rs. 1,00,000. 31.4 Under section 269P of the Income-tax Act, any person presenting a document for transferring any immovable property for an apparent consideration exceeding Rs. 10,000 is required to furnish to the registering officer a statement in the prescribed form in duplicate in respect of such transfer. With a view to eliminating unproductive work in handling a large number of relatively smaller cases, the Finance Act has amended section 269P to raise the aforesaid monetary limit to Rs. 50,000. 31.5 Thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 40A(8) of the Income-tax Act and the expression "co-operative bank" shall have the meaning assigned to it in Part V of the Banking Regulation Act, 1949. The expression "loan or deposit" for the purposes of this provision, would mean loan or deposit of money. 32.5 Fears have been expressed in certain quarters that the provision will adversely affect the rural sector and farmers who bring produce to mandies for sale. The prohibition contained in section 269SS is confined to loans and deposits only and does not extend to purchase/sale transactions. 32.6 Section 276DD inserted in the Income-tax Act by the Finance Act, provides that if a person, without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the aforesaid provisions, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to a fine equal to the amount of such loan or deposit. 32.7 The provisions take effect from 1st April, 1984, but as stated above, the prohibition contained therein will apply only in relation to any loan or deposit taken or accepted after 30th June, 1984. [Sections 28, 29 and 31 of the Finance Act] (xxv) Modifica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the property is given by the claimant within a period of one year from the said date, that is, by 1st March, 1985, to the Commissioner of Income-tax. 33.5 The aforesaid time-limit for giving notice to the Commissioner of Income-tax will not apply in cases where the value of any suit relating to any immovable property does not exceed Rs. 50,000. In such cases, it will suffice if, at any time before the suit is instituted, notice in the prescribed form and containing the prescribed particulars in respect of the property is given by the claimant to the Commissioner of Income-tax. 33.6 The new provision enables the real owner of the property to obtain a certified copy of the notice given by him to the Commissioner of Income-tax. It has, accordingly, been provided that the Commissioner of Income-tax shall, on an application being made in the prescribed manner by the claimant or any person acting on his behalf or claiming under him, and on payment of the prescribed fees, issue for the purposes of a suit, a certified copy of any notice given by the claimant to the Commissioner of Income-tax. It will be obligatory for the Commissioner to given the certified copy within 14 days from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n consequence, been omitted by the Finance Act. 35.4 Under the second proviso, a further exemption up to Rs. 25,000 has been allowed in respect of deposits in such National Deposits Scheme as may be framed by the Central Government and notified by it in this behalf in the Official Gazette. 35.5 The effect of the aforesaid amendments made may be illustrated as follows:- Item Value on valuation date Exemption available Rs. Rs. I. Shares in Indian companies 2,00,000 2,00,000 Units of the Unit Trust of India 50,000 50,000 Deposits under National Deposit Scheme 20,000 20,000 2,70,000 2,70,000 II. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 50,000 35,000 Deposits under National Deposit Scheme 20,000 20,000 3,70,000 3,20,000 III. Shares in Indian companies 3,00,000 2,65,000 Units of the Unit Trust of India 1,00,000 35,000 Deposits under National Deposit Scheme 1,00,000 25,000 5,00,000 3,25,000 35.6 The amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 34(a)(i)(2) and (3), (ii) and (iii) of the Finance Act] (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so be charged to wealth-tax at the maximum marginal rate of wealth-tax applicable in the case of an individual who is citizen of India and resident in India, which is 5% at present. It has also been provided that the net wealth in such cases will be computed without excluding the value of any asset under sub-section (1) of section 5 of the Wealth-tax Act. 36.5 Under section 10(21) of the Income-tax Act, income of a scientific research association for the time being approved for the purposes of section 35(1)(ii) of the Income-tax Act, which is applied solely for the purposes of the association is exempt from income-tax. The Finance Act, 1983, amended this provision to provide that this exemption will not be available if any income by way of contributions received by the association are invested or deposited after 29th February, 1983, otherwise than in one or more of the forms or modes specified in section 11(5) of the Income-tax Act in relation to investment or deposit of moneys by charitable or religious trusts and institutions. Exemption from income-tax is also denied if any funds of the association, invested or deposited before 1st March, 1983 (otherwise than in the forms or mod ..... X X X X Extracts X X X X X X X X Extracts X X X X
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