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TMI BlogExplanatory Notes on the provisions thereofX X X X Extracts X X X X X X X X Extracts X X X X ..... wise provided in this Act, it shall come into force at once. AMENDMENTS TO THE INCOME-TAX ACT (i) Exemption by notification of allowances received by Members of Parliament and also by members of State Legislatures 4.1. Under the existing provisions of clause (17) of section 10 of the Income-tax Act, the following were exempted: (a) any daily allowance received by any person by reason of his Membership of Parliament or of any State Legislature or of any Committee thereof. (b) the allowance (initially Rs.500 per month but later increased to Rs.1,000 per month) which the Members of Parliament were entitled to receive, in lieu of additional facilities, under the Members of Parliament (Additional Facilities) rules, 1975. 4.2 In so far as (b) above is concerned, the Members of Parliament (Additional Facilities) Rules, 1975, have been repealed and have been replaced by the Members of Parliament (Constituency Allowance) Rules 1986, with effect from January 3, 1986, under which the Members of Parliament are entitled to a constituency allowance of Rs.1,250 per month. Since the existing provisions refer to the earlier rules which have been repealed, the Amending Act has conferred upon t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al undertaking set up in any free trade zone for a period of five initial assessment years. The tax exemption is granted with reference to the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce any article or thing and each of the four immediately succeeding assessment years. 5.2 As pointed out by various trade associations, such undertakings in the free trade zones do not always earn profit during all the five initial years. In such cases, they cannot avail of the full tax benefit. In order to get over the problem, the exemption for five assessment years has been permitted to be availed of within a longer time frame as per the amending Act by providing in sub-section (3) that a tax payer would be entitled to avail of the exemption, at his option, in respect of any five consecutive assessment years falling within a period of eight years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or things. The proviso to this new sub-section stipulates that in no case shall the tax holiday extend beyond this period of eight years. Furth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above announcement, amendments have been made to section 2, 32A, 34, 35, 38, 41, 43, 50, 55, 57, 59, and 155 of the Income-tax Act. 6.3 As mentioned by the Economic Administration Reforms Commission (Report No.12, para 20), the existing system in this regard requires the calculation of depreciation in respect of each capital asset separately and not in respect of block of assets. This requires elaborate book-keeping and the process of checking by the assessing officer is time consuming. The greater differentiation in rates, according to the date of purchase, the type of asset, the intensity of use, etc., the more disaggregated has to be the record-keeping. Moreover, the practice of granting the terminal allowance as per section 32(1)(iii) or taxing the balancing charge as per section 41(2) of the Income-tax Act necessitate the keeping of records of depreciation already availed of by each asset eligible for depreciation. In order to simplify the existing cumbersome provisions, the Amending Act has introduced a system of allowing depreciation on block of assets. This will mean the calculation of lump sum amount of depreciation for the entire block of depreciable assets in each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (1) of section 32 had been inserted by the Finance (No.2) Act, 1980, to provide for additional depreciation in respect of new plant or machinery installed before 1-4-1985 in certain cases. These provisions have lost their relevance as they were applicable for the limited period of the Sixth Five Year Plan. Hence, they have been omitted by the Amending Act. (e) The objective underlying the terminal adjustment is to ensure that the total depreciation in relation to any particular item of asset is limited to 100 per cent. This is achieved by the existing provisions of section 32(1)(iii) allowing a deduction for the shortfall in the year of sale, etc. Conversely section 41(2) of the Income-tax Act provides for taxing in the year of sale, etc. the excess depreciation allowed in the past. Because of the introduction of the system of allowing depreciation on blocks of assets at enhanced rates, both these provisions have lost their relevance and hence they have been omitted by the Amending Act. Under the new system the moneys payable in respect of the assets sold, discarded, demolished or destroyed will be reduced from the written down value of the block. (f) Section 32(1)(iv) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed assets have been omitted. Further, the existing Explanation below section 41(4) of the Income-tax Act has been substituted by another Explanation defining the expressions "moneys payable" and "sold". The former shall include any insurance, salvage or compensation moneys payable in respect of a discarded asset. The latter expression shall include a transfer by way of exchange or a compulsory acquisition under any law but it will not include a transfer of an asset by the amalgamating company to the amalgamated company in a scheme of amalgamation. (k) By an amendment to Explanation 1 to section 43 of the Income-tax Act, it has been provided that where an asset is used for the purposes of business after it ceases to be used for scientific research related to that business, the actual cost to the assessee for depreciation purposes shall be the actual cost to the assessee as reduced by any deduction allowed under section 35 (1)(iv). (l) By an amendment to Explanation 2 to section 43(1) of the Income-tax Act, it has been provided that where an asset is acquired by way of gift or inheritance, its actual cost shall be the actual cost to the previous owner as reduced in the first instan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that previous year. (o) Under the new system, the written down value of any block of assets may be reduced to nil for any of the following reasons:- (A) the moneys receivable by the assessee in regard to the assets sold or otherwise transferred during the previous year together with the amount of scrap value may exceed the written down value at the beginning of the year as increased by the actual cost of any new asset acquired, or (B) All the assets in the relevant block may be transferred during the year. Section 50 of the Income-tax Act prescribing the manner in which the cost of acquisition in the case of depreciable assets may be computed for the purposes of determining the capital gains has been substituted by new provisions by the Amending Act to take care of both the above situations. The particulars of these provisions, overriding section 2(42A) of the Income-tax Act, are as under:- (A) The newly substituted section 50(1) provides that in a case where any block of assets does not cease to exist but the full value of the consideration received or accruing as a result of the transfer of the depreciable assets by the assessee during the previous year exceeds the aggregat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ,52,500.00 Since the items of plant and machinery which currently qualify for depreciation at the rate of 15 per cent. are proposed to be classified into a block of assets which will be entitled to depreciation at the rate of 33-1/3 per cent. for the assessment year 1988-89 and subsequent years, in this example the aggregate written down value of the block of assets at the beginning of the previous year will be Rs.5,52,500. Presuming that during the financial year 1987-88, the assessee sold item I for a consideration of Rs.2,00,000 and bought a new item (item 4) falling in the same block of assets during the said financial year for a consideration of Rs.2,50,000, the depreciation to be allowed in respect of the assessment year 1988-89 will be as follows:- Rs. Aggregate WDV of the block at the beginning of the previous year 5,52,500 The actual cost of the new asset acquired during the previous year 2,50,000 8,02,500 Less : Sale proceeds in respect of the assets sold 2,00,000 WDV of the block for the assessment year 1988-89 6,02,000 Depreciation for the assessment year 1988-89 at 331/3% of Rs. 6,02,000 2,00,667 WDV for the assessment year 1989-90 4,01,333 Example II ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... new industrial undertakings or hotels in backward areas. In terms of Explanation to this section, "backward area" means an area specified in the list of the Eighth Schedule. This list needs frequent updating in conformity with the notifications issued by the Ministry of Industry including or excluding an area as "No Industry District" or "Special Region District". As a result, there is a time lag between the notification made by the Ministry of Industry and the subsequent amendment to the Eighth Schedule to the Income-tax Act. In order to reduce this time lag, enabling powers have been acquired by the new sub-section (11), substituted in place of the existing Explanation below sub-section (10), by the Amending Act providing that "backward area" means such area as the Central Government may, having regard to the stage of development of that area, by notification in the Official Gazette, specify in this behalf. As per the proviso to this new sub-section, no notification may be issued so as to have retrospective effect to a date earlier than 1-4-1983. 7.2 The existing Eighth Schedule to the Income-tax Act incorporated by the Direct Taxes (Amendment) Act, 1974, was amended last by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... back to the deduction based on turnover on the ground that the new profit-based deduction operates harshly on exporters. A profit-based incentive is administratively simple and it awards greater efficiency. A turnover based incentive, on the other hand, takes care of the need of those exporters who, for various reasons, do not earn profit, but contribute in a significant measure to the foreign exchange earnings with their large turnover. The system of incentive on the basis of incremental turnover encourages growth. On a consideration of these factors, the incentive provided by the Amending Act is based on profit, as also the turnover to the extent it is reflected as net foreign exchange realisation. The new sub-section (1) of section 80HHC, accordingly, provides that the deduction would be equal to the aggregate of four per cent. of the net foreign exchange realisation and fifty per cent. of the remaining export profits subject to the condition that the aggregate deduction shall not exceed the export profits. To illustrate, in a case where the total free on board value of exports is Rs.1,000 and the aggregate of the cost, insurance and freight value of all categories of licences ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... board value of their exports from the small scale industrial sector and as a proportion of the net foreign exchange earnings from the non-small scale industrial sector. The Import and Export Pass Book Scheme is applicable only to registered manufacturer-exporters to provide duty-free access to imported inputs for export production. The need to apply repeatedly for advance/imprest and replenishment licences is eliminated with the issue of this pass book which serves as a single all purpose duty-free import licence. A separate pass book is issued for each export product indicating the value of items allowed for import as well as export obligation thereon. Each pass book will bear a suitable export obligation. The holder of this pass book will not be entitled for issue of any advance imprest licences for that export product admissible against its exports. 8.3 As per the new sub-section (4) inserted after sub-section (3) and before the Explanation, it has been provided that the deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant as defined in the Explanation below sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the prescribed manner. This return has to be furnished within the specified period. It was held by the Supreme Court in the case of C.I.T. v. Ranchhoddas Karsondas (36 ITR 369) (SC), that a return disclosing income below taxable limit submitted voluntarily under section 22(1) of the Indian Income-tax Act, 1922 [corresponding to section 139(1) of the Income-tax Act, 1961], is a good return and such a return voluntarily made before the assessment cannot be ignored by the Income-tax Officer. This decision has been superseded by the Amending Act by inserting sub-section (10) after sub-section (9) of section 139. The new sub-section (10) provides that notwithstanding anything contained in any other provisions of this Act, a return of income which shows the total income below the maximum amount which is not chargeable to tax shall be deemed never to have been furnished. As per the proviso to this sub-section, a return of income below taxable limit shall not be treated as non est in the following circumstances: (a) a return furnished in response to a notice under section 148(2); (b) a return of a partner of a firm; (c) a return of a person who has claimed exemption of income from pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icers in the field formations irrespective of the amount involved. Hence, by the Amending Act, the power to reduce or waive the interest paid or payable under section 220 has been conferred on the Commissioner of Income-tax. 10.4 This amendment shall come into force with effect from 1-4-1987. [Section 13 of the Amending Act] (viii) Amendments to Reorganise the Settlement Commission 11.1 As per the provisions of section 245B(2) of the Income-tax Act, the Settlement Commission consists of a Chairman and two other members. In view of the heavy workload of the Settlement commission and in the interest of early finalisation of cases, it has been provided by the Amending Act that the Settlement Commission shall consist of a Chairman and as many vice-Chairmen and other members as the Central Government thinks fit. Section 245B(1A) providing for the contingency when the post of one or the other member of the settlement commission as presently constituted, is vacant has become irrelevant and hence has been omitted. Similarly, section 245D(5) being a provision subject to section 245B(2A) has also been omitted. In section 245B(3) which provides for the appointment of the Chairman and memb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irect tax laws similar to those which already exist in the Customs Act and the Gold (Control) Act. For example, under section 123(1) of the Customs Act, 1962, when any gold, diamonds, or any other class of specified goods are seized in the reasonable belief that they are smuggled goods, the burden of proving that they are not smuggled goods shall be on the person from whose possession the goods were seized and any person claiming to be the owner of such seized goods. Similarly, under section 98B of the Gold (Control) Act 6, 1968, in any prosecution for an offence under that Act which requires a culpable mental state on the part of the accused, the court shall presume the existence of such mental state but it shall be open to the accused to prove the fact that he had no such mental state with respect to the offence. Accordingly, the intention of the Government was announced by the LTFP to amend the direct tax laws also to provide similar provisions so that once evasion is proved, the intention to evade need not be proved by the Department. 12.3 Apart from the above, in the context of the existing scheme of accepting returns with incomes up to Rs.1 lakh without scrutiny, which is ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-section (1) of section 272AA, sub-section (1) of section 272B or clause (b) of sub-section (1), or clauses (b) and (c) of sub-section (2) of section 273, no penalty shall be imposable on the person or the assessee, as the case may be, for any failure referred to in the said provisions if he proves that there was reasonable cause for the said failure. By this amendment, the onus of proving the existence of reasonable cause for the defaults referred to in these provisions has been cast on the taxpayer. In this context, reference may be made to section 123(1) of the Customs Act, 1962, as discussed in para 12.2 above. (c) (A) Section 271(1)(c) of the Income-tax Act provides that penalty shall be leviable in the case of an assesse who has concealed the particulars of his income or furnished inaccurate particulars thereof. In a series of decisions beginning with the judgment in 1970, in the case of CIT vs. Anwar Ali [1970] 76 ITR 696, (SC) based on the law as it stood prior to 1-4-1964, the Supreme Court laid down the following basic principles for levying penalty under these provisions: (i) an order imposing a penalty is the result of quasi-criminal proceedings and the burden lay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e books of account are found, a taxpayer is liable to penalty for concealment even if he declares the full value of those assets as his income in the return filed after the search. This provisions has been found to operate even in cases where the assessee has no intention to fabricate any evidence and he includes in his return the income out of which such assets have been acquired. Hence, by the Amending Act, it has been provided that if an assessee in such cases makes a statement during the course of the search admitting that the assets found at his premises or under his control have been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time prescribed in clause (a) or (b) of section 139(1) and specifies in the statement the manner in which such income has been derived and pays the taxes that are due thereon, no penalty shall be leviable. (d) Under the existing provisions, prosecution has been provided under section 276A(i) for non-compliance with the provisions of section 178 (1), under section 276A(ii) and (iii) for non-compliance with the provisions of section 178(3), under section 276AA for non-complia ..... X X X X Extracts X X X X X X X X Extracts X X X X
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