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TMI BlogThe Finance Act, 1985-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 ..... e Finance Act) has,- (i) amended sections 2, 10, 16, 17, 35CC, 36, 37, 40A, 44AB, 54, 58, 80CC, 80G, 80-I, 80QQA, 115, 115E, 136, 139, 208, 245D, 273A and 278A of the Income-tax Act, 1961; (ii) inserted new sections 33AB, 35AB and 180A in the Income-tax Act, 1961; (iii) substituted sections 80HHC and 167A of the Income-tax Act, 1961; (iv) omitted sections 80F, 80JJ, 80N, 80V and 80VV; (v) amended sections 5, 18B, 22D and Schedule I of the Wealth-tax Act, 1957; and (vi) amended section 6 of the Interest-tax Act, 1974. PROVISIONS IN BRIEF 3. The provisions of the Finance Act, 1985, in the sphere of direct taxes, relate to the following matters: (i) Prescribing the rates of income-tax (inclu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... interested"; and some other matters. (iii) Amendment of Wealth-tax Act, 1957, with a view to providing for an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of one residential house property and other specified assets; withdrawal of exemption from wealth-tax in respect of business assets of certain charitable and religious trusts; modification of the provisions relating to reduction or waiver or penalty in certain cases; reduction in the rates of wealth-tax and some other matters. (iv) Amendment of the Interest-tax Act, 1974, to provide that interest-tax will not be charged in respect of interest accruing or arising to scheduled banks after 31st March, 1985. RATE STRUCTURE OF INCOME-TAX (i) Rates of income-tax in respect of incomes liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... three respects. Firstly, in consequence of the proposed reduction in the maximum marginal rate of personal income-tax (referred to in para. 6.4 below) to 50 per cent., the rate of deduction of tax at source from winnings from lotteries has been reduced from 30 per cent. to 25 per cent. because under section 80TT of the Income-tax Act, a deduction is allowed from such winnings of a sum of Rs. 5,000 plus 50 per cent. of the winnings from lotteries in excess of Rs. 5,000. Secondly, in consequence of the proposed discontiunance of the levy of surcharge on income-tax in the case of non-corporate taxpayers (referred to in paragraph 6.3 below), the rates for deduction of tax at source from income of such taxpayers do not also provide for surcharge. Thirdly, in consequence of the proposed reduction in the rates of basic income-tax in the case of companies (referred to in paragraph 6.7 below), the general rate for deduction of tax at source in the case of foreign companies stands reduced from 70 per cent. to 65 per cent. and the rate of surcharge stands reduced consequentially from 3.50 per cent. to 3.25 per cent. (iii) Rates for deduction of tax at source from "Salaries", computation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the aforesaid categories of taxpayers: (a) as specified in Part I of the First Schedule to the Finance Act, i.e., the existing rates; and (b) as specified in Part III of the First Schedule to the Finance Act, i.e., the new rates. TABLE 1 Slabs of income with rates in the case of individuals, Hindu undivided families (other than those covered by Table 2), unregistered firms, etc. Income slab Rates as specified in Part I of the First Schedule to the Finance Act (i.e., existing rates) Income slab Rates as specified in Part III of the First Schedule to the Finance Act(i.e., new rates) Up to Rs. 15,000 Nil Up to Rs. 18,000 Nil Rs. 15,001-20,000 20% Rs. 18,001-25,000 25% Rs. 20001-25,000 25% Rs. 25,001-50,000 30% Rs. 25,001-30,000 30% Rs. 50,001-1,00,000 40% Rs. 30,001-40,000 35% Over Rs. 1,00,000 50% Rs. 40,001-50,000 40% Rs. 50,001-70,000 45% Rs. 70,001-1,00,000 50% Over Rs. 1,00,000 55% TABLE 2 Slabs of income with rates in the case of Hindu undivided families, having one or more members with independent income exceeding the exemption limit Income slab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence of tax at selected levels of income in the case of Hindu undivided families having one or more members with independent income exceeding the exemption limit Income Income-tax (including surcharge at existing rates) Income-tax at new rates without surcharge(which has been abolished) Tax relief Tax relief as percen- tage of tax in Col. (2) (Rs.) (Rs.) (Rs.) (Rs.) (%) (1) (2) (3) (4) (5) 13,000 450 250 200 44.44 14,000 900 500 400 44.44 15,000 1,350 750 600 44.44 16,000 1,800 1,000 800 44.44 17,000 2,520 1,250 1,000 44.44 18,000 2,644 1,500 1,144 43.27 19,000 2,948 1,750 1,198 40.64 20,000 3,251 2,000 1,251 38.48 21,000 3,645 2,300 1,345 36.90 22,000 4,039 2,600 1,439 35.63 23,000 4,433 2,900 1,533 34.58 24,000 4,826 3,200 1,626 33.69 25,000 5,220 3,500 1,720 32.95 30,000 7,470 5,000 2,470 33.07 40,000 13,095 8,000 5,095 38.91 50,000 18,720 12,000 6,720 35.90 60,000 25,470 16,000 9,470 37.18 70,000 32,220 21,000 11,220 34.82 80,000 38,970 26,000 12,970 33.28 90,000 45,720 31,000 14,720 32.20 1,00,000 52,470 36,000 16,470 31.39 1,50,000 86,220 63,500 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able by the company shall be reduced by the amount of the deposit so made. Partially integrated taxation of non-agricultural income with income derived from agriculture. 6.9 As in the past, the Finance Act has provided that in the case of individuals, Hindu undivided families, unregistered firms, other associations of persons, etc., the net agricultural income will be taken into account for computation of "advance tax" and charging of income-tax. These provisions are broadly on the same lines as those in earlier years. [Section 2 and the First Schedule to the Finance Act] AMENDMENT TO INCOME-TAX ACT Amendment of the definition of "company in which the public are substantially interested". 7.1 The Finance Act, 1983, amended section 2(18) of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, having regard to the need for extending special protection to the workmen in the undertaking to which the scheme applies and other relevant circumstances. 8.3 The amendments take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 4(a) of the Finance Act] Exemption from income-tax in respect of interest payable to foreign banks performing central banking functions. 9.1 The Finance Act has inserted a new sub-clause (iiia) in clause (15) of section 10 of the Income-tax Act with a view to providing exemption from income-tax in respect of interest payable to any foreign bank performing central banking functions. This exemption will be available only where the interest is payable in respect of the deposits made by such bank with any scheduled bank in India with the approval of the Reserve Bank of India. 9.2 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 4(b) of the Finance Act] Exemption in respect of residents of Ladakh. 10.1 Under an existing provision, income accruing or arising t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies not provided for by way of monetary payment exceeds Rs. 18,000. In the context of the raising of the exemption limit, the Finance Act, 1985, has raised the said limit to Rs. 24,000. It has also been clarified that, in cases where salary is received from more than one employer, the aggregate salary from these employers, will have to be taken into account for the purposes of this provision. 12.2 The amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 6(a) of the Finance Act] Discontinuance of the provision for taxation of perquisites represented by interest-free loans or loans at concessional rate of interest to employees. 13.1 Under sub-clause (vi) of clause (2) of section 17 of the Income-tax Act, inserted by the Taxation Laws (Amendment) Act, 1984, where the employer has advanced any loan to an employee for building a house or purchasing a site or a house and a site or 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss. Any excess deposit made in the previous year shall be treated as a deposit made by such person in the next following previous year. 14.2 Where any amount is withdrawn by such person from the speical account with the Bank, for acquiring any asset, being building, machinery, plant or furniture, the actual cost of such asset shall, for the purposes of the Income-tax Act, be reduced by the amount so utilised. Where the amount withdrawn from the special account is utilised for incurring any expenditure for the purposes of the business of growing or manufacturing tea in India, such expenditure shall be reduced by the amount so utilised and only the resultant sum, if any, shall be taken into account for the purpose of computation of income. 14.3 Where any amount released from the special account during any previous year by the Bank for being utilised by such person for the purpose of the business of growing and manufacturing tea in India, in accordance with the scheme, is not so utilised during that previous year, the unutilised amount shall be deemed to be the profits and gains from business and accordingly chargeable to income-tax as the income of such person of that previous year ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roviding that no such programme shall be approved after 16th March, 1985. [Section 9 of the Finance Act] Deduction in respect of provisions made by banking companies for bad and doubtful debts. 17.1 Section 36(1)(vii) of the Income-tax Act provides for a deduction in the computation of taxable profits of the amount of any debt or part thereof which is established to have become a bad debt in the previous year. This allowance is subject to the fulfilment of the conditions specified in sub-section (2) of section 36. 17.2 Section 36(1)(viia) of the Income-tax Act provides for a deduction in respect of any provision for bad and doubtful debts made by a scheduled bank or a non-scheduled bank in relation to advances made by its rural branches, of any amount not exceeding 1-1/2 per cent. of the aggregate average advances made by such branches. 17.3 Having regard to the increasing social commitments of banks, section 36(1)(viia) has been amended to provide that in respect of any provision for bad and doubtful debts made by a scheduled bank [not being a bank approved by the Central Government for the purposes of section 36(1)(viiia) or a bank incorporated by or under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o a deduction up to 40 per cent. of their total income computed before making any deduction under Chapter VI-A carried by them to a reserve account. The Finance Act provides that the deduction shall be of an amount not exceeding 40 per cent. of the total income as computed before making any deduction under the aforesaid provision and Chapter VI-A. 18.3 The amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 10(a)(iii) of the Finance Act] Withdrawal of provision for partial disallowance of certain items of business expenditure. 19.1 Section 37(3A) of the Income-tax Act provides that where the aggregate expenditure incurred by a taxpayer on any one or more of specified items of expenditure exceeds Rs. 1 lakh, twenty per cent. of such excess shall not be allowed as deduction in computing the taxable profits. The following items of expenditure have been specified for the purpose of this disallowance: (a) Advertisement, publicity and sales promotion. (b) Running and maintenance of aircraft and motor cars. (c) Payments made to hotels. 19.2 On a review of these provisions, it has b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of any proceedings before any income-tax authority or the Appellate Tribunal or any court relating to the determination of any liability under the Income-tax Act by way of tax, penalty or interest is allowed as a deduction in the computation of the taxable income, subject to a ceiling of Rs. 5,000. The Finance Act has deleted the aforesaid provision and inserted a new sub-section (12) in section 40A of the Income-tax Act to provide that no deduction shall be allowed in excess of Rs. 10,000 for any assessment year in respect of any expenditure incurred by the assessee by way of fees or other remuneration paid to any person (other than an employee of the assessee)- (a) for services (not being services by way of preparation of return of income) in connection with any proceeding under the Income-tax Act before any income-tax authority or the Settlement Commission or the competent authority under Chapter XXA of the said Act or the Appellate Tribunal or any court; (b) for services in connection with any other proceeding before any court, being a proceeding relating to tax, penalty, interest or any other matter under the Income-tax Act; and (c) for any advice in connection with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efined for the purposes of section 44AB, the Finance Act has amended the existing provisions to secure that, in a case where the accounts of an assessee are required to be audited by or under any other law, it will suffice if the assessee gets his accounts audited under such other law, even though the person auditing the accounts under that law may not be an "accountant" within the meaning of the term, as defined for the purposes of section 44AB, and obtains the report of the audit under such other law and a further report from the same person or from an "accountant" as defined for the purposes of the said section in the form prescribed under the said section. 22.3 This amendment takes effect from 1st April, 1985, i.e., from the date the provisions of section 44AB came into force under the amendment made by the Finance Act, 1984. [Section 13 of the Finance Act] Consequential amendment in the provisions relating to exemption of capital gains from a residential house. 23.1 Section 53 of the Income-tax Act as amended by the Taxation Laws (Amendment) Act, 1984, with effect from 1st April, 1985, provides for complete exemption of long-term capital gain arising fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by a public company formed and registered in India and the issue should have been wholly and exclusively for the purpose of carrying on the business referred to in item (i) or item (ii) of the preceding paragraph. 24.4 This amendment takes effect from 1st April, 1985, and will, accordingly, apply in relation to the assessment year 1985-86 and subsequent years. [Section 16 of the Finance Act] Deduction in respect of educational expenses in certain cases. 25.1 Section 80F of the Income-tax Act provides for the deduction of expenses incurred by a resident, who is not a citizen of India, on the education of his dependent children outside India. The total amount of deduction allowed is Rs. 1,500 per child, subject to a maximum of Rs. 3,000. In the context of the policy of reducing tax rates and removing concessions which are not considered to be necessary, this concession has been discontinued. 25.2 This amendment takes effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 17 of the Finance Act] Modification of provision relating to deduction in respect of donations to certain funds, charitabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company) who is resident in India, is entitled to a deduction in the computation of the taxable income, of an amount equal to 1 per cent. of the export turnover plus a further amount equal to 5 per cent. of the incremental export turnover. 27.2 With a view to providing exporters with requisite resources for modernisation, technological upgradation, product development and other activities and raising their efficiency and productivity, not only in the export sector but also in the economy as a whole, the Finance Act has substituted section 80HHC to provide that an assessee, being an Indian company or a person (other than a company) who is resident in India exports out of India during the previous year, any goods or merchandise to which this section applies, will be allowed deduction of an amount, not exceeding 50 per cent. of the profits derived by the assessee from the export of such goods or merchandise. The provision to new section 80HHC(1) lays down that an amount equal to the amount of the deduction claimed should be debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account to be utilised fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ithin the period of four years next following March 31, 1981, or ships which are brought into use within the period of four years next following April 1, 1981, or hotels which start functioning after March 31, 1981, but before April 1, 1985. Under the existing provisions, 20 per cent. of the profits and gains (25 per cent. in the case of companies) derived from such industrial undertakings or a ship or the business of a hotel are allowed as a deduction in computation of the total income of the assessee for certain initial years. 28.2 The provisions relating to tax holiday are intended to provide an incentive for investment in certain desired directions and promote industrialisation. In view of the continued need to provide this incentive, the Finance Act has extended this concession by another five years, that is, in relation to new industrial undertakings which commence production before April 1, 1990; ships which are brought into use on or before the said date and hotels which start functioning before the said date. [Section 20 of the Finance Act] Deduction in respect of profits and gains from business of livestock breeding or poultry or dairy farming. 29.1 Under t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his interests in the copyright of any such books or of royalties or copyright fees, whether receivable in lump sum or otherwise. The deduction is allowed only where the following conditions are fulfilled:- (i) the book has been prescribed or recommended as a text book by any University for a degree or a post-graduate course or is a dictionary, thesaurus or encyclopaedia; (ii) the book, dictionary, thesaurus or encyclopaedia is written in a language specified in the Eighth Schedule to the Constitution. The deduction is admissible for the assessment years 1980-81 to 1984-85 (both inclusive). 31.2 In order to encourage the writing of such books, the Finance Act has extended the tax concession in section 80QQA for a further period of 5 years, i.e., for the assessment years 1985-86 to 1989-90 (both inclusive). [Section 23 of the Finance Act] Deduction of interest on monies borrowed to pay taxes. 32.1 Section 80V of the Income-tax Act provides for a deduction in respect of interest paid by the taxpayer on moneys borrowed for payment of income-tax. In the context of the policy of reducing the tax rates and removing concessions which are not considered to be necessary, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 of the Finance Act] Modification of the provisions relating to proceedings before income-tax authorities. 35.1 Under section 136 of the Income-tax Act, proceedings before an income-tax authority are deemed to be judicial proceedings within the meaning of sections 193 and 228 and for the purposes of section 196 of the Indian Penal Code. The Finance Act has amended the said section to also provide that an income-tax authority shall be deemed to be a Civil Court for the purposes of section 195, but not for the purposes of Chapter XXVI, of the Code of Criminal Procedure, 1973. This amendment is intended to secure that prosecution proceedings for offences under the relevant provisions of the Indian Penal Code may be launched on the complaint of the concerned income-tax authority. 35.2 The amendment takes effect from 1st April, 1974, that is, the date from which the Code of Criminal Procedure, 1973, came into force. [Section 28 of the Finance Act] Modification of the provisions relating to return of income. 36.1 Under section 139(1A) of the Income-tax Act, a person whose income chargeable under the head "Salaries" (exclusive of the value of all benefits or amen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... low rates of tax depending upon the size of the income. With a view to countering tax avoidance through this method, the Finance Act has amended section 167A to secure that, where the individual shares of the members of an association of persons in the whole or any part of the income of such association are indeterminate or unknown, income-tax will be charged on the whole of the total income of the association at the maximum marginal rate. 38.3 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 of the Finance Act] Provision for concessional taxation of consideration for know-how. 39.1 With a view to encouraging the development of indigenuous know-how, the Finance Act has made a special provision for taxation of lump sum consideration received or receivable for know-how. 39.2 The new section provides that where the time taken by an individual who is resident in India for developing any know-how is more than twelve months, he may elect that the gross amount of the lump sum consideration received or receivable by him during the previous year for allowing the use of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o pay advance tax if its income (exclusive of capital gains, etc.) exceeds Rs. 12,000. With the raising of the exemption limit, the aforesaid limit of Rs. 15,000 is also being raised to Rs. 18,000. 40.3 The amendments take effect from May 24, 1985, that is, the date on which the Finance Bill received the assent of the President and will, accordingly, apply in relation to advance tax payable during the financial year 1985-86 and subsequent years. [Section 32 of the Finance Act] Clarification regarding payment of income-tax in case of application to the Settlement Commission 41. Under the provisions of sub-section (2A) of section 245D, as inserted by the Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of income-tax payable on the income disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The relevant provision has been amended by the Finance Act to clarify that the assessee shall be required to pay the additional amount of income-tax payable on the income disclosed in the application to the Settlement Commission only if the Settlement Commission passes an or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ides that where a person who has been convicted on an offence specified in that section is again convicted for the same offence, he shall be punishable for the second and every subsequent offence with rigorous imprisonment for a minimum term of six months and a maximum term of seven years with fine. 43.2 Section 269SS of the Income-tax Act debars persons from taking or accepting after June 30, 1984, from any other person any loan or deposit otherwise than by an account payee cheque or account payee bank draft if the amount of such loan or deposit or the aggregate amount of such loan and deposit is Rs. 10,000 or more. Section 276DD provides that if a person without reasonable cause or excuse, takes or accepts any loan or deposit in contravention of the aforesaid provision, he shall be punishable with imprisonment for a term which may extend to two years and shall also be liable to fine equal to the amount of such loan or deposit. 43.3 The Finance Act has amended section 278A of the Income-tax Act so as to also include an offence under section 276DD within the scope of section 278A. The effect of this amendment will be that a person convicted of an offence under section 276DD for t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th-tax Act, one house belonging to the taxpayer upto the value of Rs. 2 lakhs is exempt from wealth-tax. The value of specified assets held by the taxpayer upto Rs. 2,65,000 and the value of units in the Unit Trust of India or deposits under the National Deposit Scheme or both, up to an aggregate amount of Rs. 35,000, is also exempt from wealth-tax. The aggregate exemption under these provisions works out to Rs. 5 lakhs. 45.2 With a view to providing taxpayers with a wider choice of investing in tax-exempt assets, the Finance Act has deleted the separate ceiling limits in respect of the exemption of the aforesaid assets and provided an overall exemption up to Rs. 5 lakhs in respect of the aggregate value of these assets. However, the additional exemption upto Rs. 25,000 exclusively provided in respect of deposits under the National Deposit Scheme will continue to be available. 45.3 The amendment takes effect from 1st April, 1986, and will, accordingly, apply, in relation to the assessment year 1986-87 and subsequent years. 45.4 Under an existing provision exemption from wealth-tax in respect of deposits under the National Deposit Scheme is allowed only if the deposit is held by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxation Laws (Amendment) Act, 1984, the applicant is required to pay the additional amount of wealth-tax payable on the wealth disclosed in the application within 35 days of the receipt of a copy of the order passed by the Settlement Commission. The Finance Act has amended the relevant provision to clarify that the assessee shall pay the additional amount of wealth-tax payable on the wealth disclosed in the application to the Settlement Commission only if the Settlement Commission passes an order under sub-section (1) of section 22D allowing the application for settlement to be proceeded with. The amended provision will take effect retrospectively from 1st October, 1984, that is, from the date the said sub-section was inserted by the Taxation Laws (Amendment) Act, 1984. [Section 39 of the Finance Act] Reduction in the rates of wealth-tax. 48. The rates of wealth tax applicable in the case of individuals and Hindu undivided families are laid down in Part I of Schedule I to the Wealth-tax Act. The said rate schedule has been substituted by a new rate schedule. The new rate schedule has been substituted by a new rate schedule. The new rate schedule also raises the exemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (d) Over Rs. 10,00,000 5% (d) Over Rs. 10,00,000 3% 51. Comparative incidence of wealth-tax at selected levels of net wealth in the case of such Hindu undivided families is indicated in the Table below: Table Wealth Wealth-tax at existing rates Wealth-tax at new rates Tax relief Tax relief as percentage of tax in Col. (2) (1) (2) (3) (4) (5) (Rs.) (Rs.) (Rs.) (Rs.) (%) 2,50,000 3,750 1,000 2,750 73.33 5,00,000 8,750 3,500 5,250 60.00 10,00,000 23,750 13,500 10,250 43.16 15,00,000 48,750 28,500 20,250 41.54 20,00,000 73,750 43,500 30,250 41.02 25,00,000 98,750 58,500 40,250 40.76 50,00,000 2,23,750 1,33,500 90,250 40.34 52. The new rate schedules take effect from 1st April, 1986, and will, accordingly, apply in relation to the assessment year 1986-87 and subsequent years. [Section 40 of the Finance Act] ..... X X X X Extracts X X X X X X X X Extracts X X X X
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