TMI BlogExplanatory Notes on the provisions of the Taxation Laws (Amendment) Act, 1984 - Part IIX X X X Extracts X X X X X X X X Extracts X X X X ..... see who converts a capital asset owned by him into a trading asset of his business and then seels the converted asset is able to avoid payment of tax on the capital gains represented by the appreciation in the value of the asset up to the date of its conversion. This is because the assessee can claim that the mere conversion of a capital asset into a trading asset does not amount to a transfer. The assessee can also claim that for the purposes of determining his business profits from the sale of the converted asset, the cost of such asset should be taken as its market value on the date of its conversion into a trading asset, and not its actual cost of acquisition to him. Hence, when the converted capital asset is sold by him as stock-in-trade, only the difference between sale price and market value of the stock-in-trade on the date of the conversion of the capital asset can be regarded as profit accruing to the assessee from the transaction. 2.3 With a view to preventing the avoidance of tax on such capital gains through the device of converting a capital asset into a trading asset, the Amending Act has substituted the definition of "transfer" in section 2(47) of the Act by a new ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ional rate of interest and confers a benefit which should be assessable as a perquisite. 4.2 The Amending Act has inserted a new sub-clause (vi) in clause (2) of section 17 of the Act to provide that where the employer has advanced any loan to an employee for building a house or purchasing a site or a house and a site for purchasing a motor car and either no interest is charged by the employer on such loan or interest is charged at a rate which is lower than the rate of interest which the Central Government may specify in this behalf by notification in the Official Gazette, an amount calculated on the following basis shall be regarded as perquisite received by the employee and charged to tax accordingly:- (a) In a case where such loan is advanced without charging any interest, the amount of interest (calculated in the prescribed manner) on such loan at the rate notified (b) in a case where such loan is advanced by charging interest at a rate which is lower than the rate so notified, the amount of the difference between the interest (calculated in the prescribed manner) on such loan at the rate so notified and the interest charged by the employer. 4.3 In notifying the rate o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SE PROPERTY - SECTION 24 6.1 Section 24(1)(x) of the Act provides that (subject to the conditions laid down in rule 4 of the Income-tax Rules, 1962), the rent which an assessee cannot realise from his tenant will be allowed as deduction in computing his income from the property. There is, however, no provision in the Act for charging income-tax in cases where the amount which has been allowed as deduction is subsequently recovered by the assessee. 6.2 The Amending Act has inserted a new section 25A in the Act to provide that where a deduction has been allowed under section 24(1)(x) in respect of unrealised rent and subsequently during any accounting year the assessee has realised any amount in respect of such rent, the rent so realised shall be chargeable under the head "Income from house property" and, accordingly, charged to tax (without making any deduction under section 23 or section 24 of the Act) as the income of that year irrespective of whether the assessee is the owner of that property in that year or not. 6.3 The new section takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , interest paid by the firm to such individual shall not be taken into account for the purposes of section 40(b) of the Act, if such interest is received by him, on behalf, or for the benefit of any other person. In other words, if an individual is a partner in a firm in his personal capacity, interest paid by the firm to such individual, not in his personal capacity, but say, as representing an HUF of which he is the karta, shall not be taken into account for the purposes of section 40(b) of the Act. 7.5 These amendments will take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 10 of the Amending Act] EXPENSES OR PAYMENTS NOT DEDUCTIBLE IN CERTAIN CIRCUMSTANCES - SECTION 40A 8.1 Section 40A(5) of the Act places certain limits on the deductible amount of expenditure incurred by an assessee in respect of payment of salary to any employee or a former employee or in providing any perquisite, etc., to such employee. Explanation 2 to section 40A(5) defines the expressions "salary" and "perquisite" for the purposes of the aforesaid provision. 8.2 The Amending Act has inserted a new sub-clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 12 of the Amending Act] WITHDRAWAL OF EXEMPTION IN CERTAIN CASES - NEW SECTION 47A 10.1 Under clause (iv) of section 47 of the Income-tax Act, capital gain arising from the transfer of a capital asset by a company to its wholly-owned subsidiary company is exempt from tax. Similarly, under clause (v) of section 47, capital gain arising from the transfer of a capital asset by a subsidiary company to the holding company is also exempt from tax. Exemption under this provision is allowed only if the transferee company is an Indian company. 10.2 The Amending Act has inserted a new section 47A to provide that, if at any time before the expiry of 8 years from the date of transfer of a capital asset referred to in clause (iv) or clause (v) of section 47, such capital asset is converted by the transferred company into, or is treated by it as, stock-in-trade of its business; or the parent company or its nominee, or as the case may be, the holding company ceases to hold the whole of the share capital of the subsidiary company before the expiry of the period of 8 years aforesaid, the amount of capital ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion for the transfer is Rs.6 lakhs, one-third of the capital gain arising from the transfer will be exempt from tax. The exemption under the new section 53 will not be available if the assessee owns any other residential house on the date of such transfer. 12.3 Section 54 of the Income-tax Act provides exemption in respect of long-term capital gain arising from the sale of a residential house in cases where such capital gain is utilised by the taxpayer for purchasing or constructing another residential house within the specified period. Sub-section (1) of section 54 provides that the exemption under the said section will be available in cases where the capital gain arises from the transfer of long term capital asset "to which the provisions of section 53 are not applicable". These provisions should be construed to imply that it will not be permissible for a taxpayer who has opted to avail of the tax exemption under section 53 to also seek partial exemption in respect of the remaining capital gain under section 54. In other words, the above quoted words should not be construed to imply that the exemption under section 54 will stand barred in all cases where long-term capital gain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not required to furnish a voluntary return of income, if the other conditions laid down in that sub-section are fulfilled. 15.2 The Amending Act has substituted the aforesaid clause (b) by a new clause to provide that a person whose income under the head "Salaries" (exclusive of the value of benefits or amenities not provided by way of monetary payment) does not exceed Rs.18,000, will not be required to furnish a voluntary return of income, subject to the fulfilment of the other conditions laid down in the aforesaid sub-section. As income under the head "Salaries" is computed after allowing standard deduction under section 16(i) of the Act, the effect of the amendment will be that a person whose salary (exclusive of the value of benefits and amenities aforesaid) does not exceed Rs.24,000 will not be required to furnish a voluntary return of income, subject to the fulfilment of the other conditions contained in section 139(1A) of the Act. 15.3 Under the existing provisions contained in Explanation 2 to clause (a) of section 139(8), interest for late filing of, or failure to file the return of income in the case of a registered firm is calculated by treating the registered firm a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new section 47A by section 13 of the Amending Act. (Please see Paragraph 10 above). 16.2 The new sub-section (7B) provides that where profits or gains arising from the transfer of a capital asset are not charged to tax under section 45 of the Act by virtue of clause (iv) or clause (v) of section 47 of the Act, but such profits and gains are deemed under the new section 47A to be income chargeable under the head "Capital gains", the Income-tax Officer may, make an order of amendment at any time before the expiry of four years from the end of the previous year in which the relevant capital asset was converted into, or treated as, stock-in-trade or, as the case may be, the parent company or its nominees, or, as he case may be, the holding company ceased to hold the entire share capital of the subsidiary company. 16.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 30(e) of the Amending Act] CONDITION OF LIABILITY TO PAY ADVANCE TAX - SECTION 208 17. The Amending Act, besides making an amendment of a drafting nature, has inserted a new sub-section (3) under section 208 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Amending Act has also inserted two new Explanations after sub-section (2) of section 214, Explanation 1 provides that the expression "assessed tax" shall, for the purposes of section 214, have the same meaning as in section 215(5) of the Act. This Explanation is consequential to the amendment referred to in paragraph 18.1 above. 18.5 Explanation 2 provides that an assessment made for the first time under section 146 of the Act shall be regarded as a regular assessment for the purposes of section 214. 18.6 These amendments take effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 35 of the Amending Act] INTEREST PAYABLE BY ASSESSEE - SECTION 215 19.1 Sub-section (3) of section 215 provides that where as a result of an order under any of the specified sections, the amount on which interest was payable by the assesses is reduced, the interest shall be reduced accordingly and the excess interest paid, if any, shall be refunded. 19.2 The Amending Act has substituted the aforesaid sub-section (3) by a new sub-section (3) to provide that where as a result of an order under any of the specified ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86, and subsequent years. [Section 53 of the Amending Act] EXEMPTION IN RESPECT OF CERTAIN ASSETS - SECTION 5 22.1 The Amending Act has inserted a new clause (xxviib) in subsection (1) of section 5 to provide that subject to the provisions of sub-section (1A), wealth-tax shall not be payable by an assessee in respect of a deposit with any authority constituted in India by or under any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development, or housing accommodation or for the purpose of planning, development, or improvement of cities, town and villages or for both. 22.2 Another amendment seeks to secure that exemption in respect of the deposits referred to in new clause (xxviib) inserted in section 5(1) of the Act, is subject to the monetary limit contained in sub-section (1A). 22.3 The Amending Act has made two amendments to sub-section (3) of section 5. These are explained below:- (i) Under the existing provisions, exemption under section 5(1) in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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