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TMI BlogExplanatory Notes on the provisions of the DTL (Amendment) Act, 1989 [excluding those discussed in the Explanatory Notes on the provisions of the DTL (Amendment) Act, 1987]--Parts I to III issued under Circulars Nos. 545, 549 and 551X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of that Act, issued under Circular No.s. 545, 549 and 551. Abbreviations used 1.2 In these explanatory notes following abbreviations have been used:- (i) The Direct Tax Laws (Amendment) Act, 1987 has been referred to as the "Amending Act, 1987". (ii) The Direct Tax Laws (Amendment) Act 1989 has been referred to as the "Amending Act, 1989". (iii) The various provisions of the Income-tax, Wealth-tax and Gift-tax Acts, as they stood before amendments by the Direct Tax Laws (Amendment) Act, 1989 have been referred to as the "old provisions". Objects of the Amending Act, 1989 2. The main objectives sought to be achieved are:- (i) To withdraw the following new provisions introduced by the Amending Act, 1987:- (a) Scheme of taxation of firm and partners. (b) Scheme of tax treatment of charitable and religious trusts, etc., scientific research and sports associations and institutions of national importance. (c) Charging of additional tax in lieu of penalty for concealment of income/wealth/gift (ii) To further amend those provisions of the Income- tax, Wealth-tax and Gift-tax Acts, which were earlier amended by the Amending Act, 1987, to remove some anomalies and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Foreign companies, which provide technical assistance in accordance with agreements entered into with the Government of India, are taxable in India in respect of fees for technical services received by them. The tax leviable is 30% of the gross fees for technical services received by them. Accordingly, foreign companies providing technical assistance in connection with defence projects were also liable to similar tax. It was felt that foreign companies hesitated to provide such technical assistance due to hassles of taxation procedure. Therefore, the Amending Act, 1989 has inserted a new clause (6C) in section 10 to provide that income by way of fees for technical services received by a foreign company, which the Central Government may, by notification in the Official Gazette, specify in this behalf, shall not be included in the total income of such a company, where such income is received in pursuance of an agreement entered into with the Central Government for providing services in or outside India in projects connected with security of India. 4.2. This amendment comes into force with effect from 14-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dent Indian" shall have the meaning assigned to it in section 115C(e). 5.5 It may be mentioned that in exercise of the powers conferred by the said new sub-clause (iid), the Central Government notified the "NRI Bonds, 1988" issued by the State Bank of India for purposes of exemption under the said sub-clause vide Notification No. SO 847(E) 24-10-1989, issued under No. 8474/F. No. 132/1/ 89-TPL. 5.6 Corresponding exemptions under the Wealth-tax and the Gift-tax Acts are discussed in Paras 11.2 and 20 of these explanatory notes. 5.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Clause (b) of section 4 of the Amending Act, 1989] REINTRODUCTION OF INVESTMENT ALLOWANCE AS AN OPTION TO THE EXISTING INVESTMENT DEPOSIT ACCOUNT SCHEME Amendments to section 32A to revive investment allowance 6.1 It was decided in the year 1986 to discontinue the deduction for investment allowance and substitute it by the new provisions of investment deposit account, where the deduction was linked with the profit of the concern. Accordingly, under the provisions of sub-section (8) of the section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i.e., 12-6-1986), but were not able to obtain timely delivery of these assets from the foreign or Indian manufacturers or dealers for reasons beyond their control, so that these could be acquired or installed only after 31-3-1987. These assessees would have been denied the benefit of deduction for no fault of theirs. It was, therefore, decided to make provisions to allow investment allowance to such assessees also. 6.4 In order to implement the decision for re-introduction of investment allowance, as indicated in Paras 6.2 and 6.3 above, the Amending Act, 1989 has made the following amendments to section 32A:- (I) A new sub-section (8B) has been substituted in the section to provide that, notwithstanding anything contained in sub-section (8) or Notification No. GSR 870(E) 12-6-1986 issued thereunder, the provisions of the section shall apply in respect of the following assets: - (a)(i) A new ship or new aircraft acquired after 31-3-1987 but before 1-4-1988, if the assessee furnishes evidence to the satisfaction of the Assessing Officer that he had entered into a contract for the purchase of such ship or aircraft with the builder or manufacturer or owner thereof before 12-6-198 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance is allowable, to clarify that the deduction shall not be allowed on a new ship or new aircraft acquired or any new machinery or plant installed after 31-3-1987 but before 1-4-1988 unless such assets are acquired /installed in the circumstances specified in clause (a) of sub-section (8B) of the section and the assessee furnishes evidence to the satisfaction of the Assessing Officer as specified in that clause. (V) Sub-section (2C) of the section allows a special rate of investment allowance, being 35 per cent, in respect of new machinery or plant which would assist in control of pollution or protection of environment and which is installed after 31-5-1983 in any industry specified in sub-section (2) of the section. This sub-section has been amended to provide that investment allowance at the enhanced rate of 35 per cent shall be allowed only in respect of such machinery or plant installed before 1-4-1987. Where such, machinery or plant is installed on or after 1-4-1987, it will be entitled to investment allowance at the nominal rate of 20 per cent under the amended provisions of sub-sections (1) and (8B) of the section. (VI) A new sub-section (8C) has been substituted in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eeding the initial-assessment year. Combined effect of the provisions of section 32A(8C) and section 32AB(10) 6.7 Since the investment allowance (section 32A) has been re-introduced as an alternative to the investment deposit account scheme (section 32AB) the combined effect of the provisions of sub-section (8C) of section 32A and sub-section (10) of section 32AB is that if the assessee exercises option to claim either of them in an assessment year (called as the initial assessment year), he will have to stick to that allowance for the said initial assessment year and a block of four subsequent assessment years. Thus, once the assessee avails of the claim under section 32A in the assessment year 1989-90 (which will become the initial assessment year for claim under section 32A), he will have to continue claiming the same allowance in the block of next four assessment years, i.e., assessment years 1990-91 to 1993-94. During these five assessment years (i.e., assessment years 1989-90 to 1993-94) he cannot claim deduction under section 32AB, for which he can opt only in the assessment year 1994-95. If the assessee opts for the deduction under section 32AB in the assessment year 1994 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd section 32AB has been made available for the first time from the assessment year 1989-90 only, the assessment year 1989-90 shall be the first initial assessment year for the purposes of exercising the option between the two sections. Thus an assessee, who had claimed deduction under section 32AB during the assessment year 1987-88 or assessment year 1988-89, can exercise the option for claiming deduction either under section 32A or under section 32AB in the assessment year 1989-90. Where any such option is exercised in the assessment year 1989-90, that will be the initial assessment year for the claim for which option is exercised. Consequential amendment of section 155(4A)(b) 6.10 The amending Act, 1989 has also made an amendment of consequential nature in clause (b) of sub-section (4A) of section 155 pursuant to the insertion of a proviso in sub-section (1) of section 32A, as discussed at Sl.No.(II) in Para 7.4 ante. 6.11 These amendments Come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Sections 6, 7 and 25 of the Amending Act, 1989] TAX CONCESSIONS TO ENCOURAGE TOURISM FOR AUGMENTING FO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, being an Indian company or a person (other than a company) resident, who is engaged in the business of a hotel, or of a tour operator, approved by the prescribed authority in this behalf or of a travel agent, deduction shall be allowed, subject to the provisions of this section, of a sum equal to the aggregate of- (a) 50 per cent of the profits derived by him from services provided to foreign tourists; and (b) so much of the amount out of the balance profits as is debited to the profit and loss account of the relevant previous year and credited to a reserve account to be utilised by the assessee for the purposes of his business in the manner laid down in sub-section (4). Thus 100 per cent of the profits derived by such hotels, tour operators and travel agents from services rendered to foreign tourists can be allowed as a deduction. However, only 50 per cent of such profits is allowed as a deduction straightaway, while profits up to the balance 50 per cent is allowed only to the extent it is credited to a reserve account and subsequently utilised for making certain specified investments for the business of the assessee. (ii) The term "travel agent" has been defined in clause ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn tourists shall be determined as follows: - (a) Where assessee's business consists exclusively of services provided to foreign tourists resulting in receipt in convertible foreign exchange, the entire profits of the business as computed tinder the head "Profits and gains of business or profession" shall be treated as such profits. (b) Where assessee's business does not consist exclusively of services provided to foreign tourists resulting in receipts in convertible foreign exchange, only the proportionate profits computed under the head "Profits and gains of business or profession" shall be entitled to the deduction. The proportion shall be the same as the receipts in convertible foreign exchange bear to the total receipts of assessee's business. (v) Sub-section (4) lays down the manner in which the amount credited to the reserve account, referred to in sub-section (1), is to be utilised. It is laid down that the said amount shall be utilised by the assessee, before the expiry of a period of five years from the year in which the amount was credited to the reserve account, for the following purposes: - (i) construction of new hotels approved by the prescribed authority in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thority' for the purpose of section 80HHD 7.6 The "prescribed authority" for the purposes of section 80HHD shall be the Director General in the Directorate General of Tourism, Government of India [Refer new sub- rule (5) inserted in rule 18BBA by the Income-tax (Eleventh Amendment) Rules, 1989 issued under Notification No. SO 975(E), 30-11-1989]. 7.7 These amendments come into force with effect from 1-4-1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years. [Sections 14 and 16 of the Amending Act, 1989] TAX CONCESSIONS TO FOREIGN COMPANIES WHO RECEIVE INCOME IN RESPECT OF UNITS, PURCHASED IN FOREIGN CURRENCY, OF A MUTUAL FUND SET UP BY PUBLIC SECTOR BANKS, ETC. Amendments of section 115A, which prescribes special rates or tax on certain incomes of foreign companies 8.1 Under the old provisions of section 115A of the Income-tax Act, the following special rates of tax were prescribed in respect of certain income of foreign companies:- (i) On interest received from Government or an Indian concern on monies borrowed in foreign currency and on dividends 25 per cent (ii) On royalties or fees for technical services received from Governme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent from any income payable to a foreign company in respect of units of a Mutual Fund 8.5 Under the old provisions of section 196A, as inserted by the Amending Act, 1987, with effect from 1-4-1988, no tax was to be deducted at source from any sums payable to the unit holders of a Mutual Fund specified under section 10(23D). Thus, even foreign companies, which do not enjoy exemption under section 80L in respect of the income from the units of such Mutual Fund and which are straightaway taxable at the rate of 25 per cent under the amended provisions of section 115A, were excluded from the provisions of tax deduction at source. This made the realisation of tax in respect of such income of the foreign companies difficult. The Amending Act, 1989 has, therefore, substituted a new section 196A in the Income-tax Act to provide that tax shall not be deducted at source from any income payable in respect of units of a Mutual Fund, specified under section 10(23D), to its unit holders, being persons other than foreign companies. It is further provided that in the case of a foreign company the rate of deduction of tax at source from income received by it in respect of units of a Mutual Fund ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decided that the profits, which are exempt under sections 80HHC and 80HHD, should be excluded from the purview of section 115J. It was also decided that section 115J should not apply to companies engaged in the business of generation or distribution of electricity. Amendments of section 115J 9.3 To achieve the objectives outlined in para 9.2 above, the Amending Act, 1989 has carried out the following amendments in section 115J: - (i) Sub-section (1) of the section has been amended to provide that the provisions of the sub-section relating to the taxability of 30 per cent of the "book profits" of companies shall not apply in the case of a company engaged in the business of generation or distribution of electricity (ii) An Explanation in the section provides for the manner of computation of "book profits" for the purposes of the section. The Amending Act, 1989 has carried out the following amendments in the said Explanation: - (a) A new clause (iii) has been inserted in the Explanation to provide that for the purposes of computation of "book profits", the net profit shall be reduced by the amount of net profits derived from the business of exports or from services provided to f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing timber 35% of the purchase price. 10.2 It was, however, pointed out that in some of the States the contracts for sale of liquor are not given by auction or any similar mode, but licences to sell the liquor are issued to the contractors by the State Government more or less on a permanent basis. The licences are renewable every year automatically on payment of the prescribed fees. Both the purchase and sale prices are regulated by the State Government. Thus indirectly the entire profit in such cases is regulated by the State laws and this leaves little scope of manipulation for tax evasion. It was, therefore, pointed out that the application of the rate of presumptive profits operated very harshly in such cases. To remove this hardship, the Amending Act, 1989 has amended section 44AC to provide that the provision for the application of rate of presumptive profit would not apply in a case where the liquor is not obtained by the buyer by way of auction and where the sale price of such liquor to be sold by the buyer is fixed by or under any State Act. 10.3 Simultaneously with the insertion of section 44AC, another section 206C was also inserted in the Income-tax Act by the Financ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s made amendments to certain provisions of the section to rationalise the same. These amendments are discussed below: - (i) Amendment of section 80C(2)(d) - Under the old provisions of clause (d) of sub- section (2) of the section, an employee participating in a recognised provident fund was allowed deduction under the section on his contributions to the provident fund subject to the limit of 1/5th of his salary or Rs. 10,000, whichever was less. The monetary ceiling of Rs. 10,000 was not very necessary and had also lost its relevance in view of the increased salary now being paid to the Government as well as non-Government employees. The said clause (d) has, therefore, been amended to remove this monetary ceiling of Rs. 10,000 therefrom. Thus the qualifying amount for deduction under the section for contributions by an employee to the recognised provident fund will now be subject to only one limit that is 1/5th of his salary. (ii) Insertion of the definition of the term "contribution"- Some appellate courts had been taking the view that even repayment of loans taken by employees from their provident funds would amount to "contributions" by them to such funds and would be entitle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o as "profits". Even sub-sections (3) and (3A) of section 80HHC itself provides for determination of export "profits" of the exporter or the supporting manufacturer and not export "income" for the purposes of deduction under the section. Therefore, to rationalise the provisions of section 80HHC and to remove the confusion, the words "whole of the income" used in sub-sections (1), (1A) and the word "income" used in sub-section (4A) of the section have been substituted by the word "profits" in each case. (ii) Sub-section (4) of the section provides that in order to claim deduction under the section an exporter should furnish, along with the return of income, the report of a chartered accountant in the prescribed form. Under the old provisions of the said sub-section (4), the chartered accountant was to certify that the deduction had been correctly claimed on the basis of the amount of "net foreign exchange realisation as determined iii accordance with the Import and Export Policy of the Government of India for the relevant period". However, "net foreign exchange realisation" was no longer relevant for computing the deduction allowable under the section, because the Finance Act, 1988 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a proviso to the said sub-section (4), discretion was allowed to the first appellate authority, i.e., any Deputy Commissioner (Appeals) or the Commissioner (Appeals) to waive the above requirement for good and sufficient reasons. 10.10 In a case where the assessee has filed a return of income, there is no reason as to why he should not have paid the tax due on the basis of income declared in the return. This is all the more necessary now under the new procedure of assessment, which has become effective from 1-4-1989, according to which the assessee must pay at the time of filing the return, not only the tax due on the basis of the returned income, but also the interest due, if any, for late filing of the return and for defaults in the payment of advance tax. In view of this, there is no justification for the said proviso to sub-section (4), at least to the extent it allows discretion to the first appellate authorities to admit an appeal even where tax on the basis of the returned income has not been paid. The Amending Act, 1989, has, therefore, amended the said proviso to limit the discretion of the first appellate authorities to admit an appeal only in cases falling in clause (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 40,000 mentioned therein to Rs. 1,00,000. Thus, a Single Member Bench of the Appellate Tribunal can now hear appeals arising from orders of assessment where the assessed income is up to Rs. 1,00,000. Amendments of sections 269A and 269B of Chapter XXA relating to acquisition of immovable properties in certain cases of transfer, to remove an anomaly 10.13 Under the old provisions of clause (b) of section 269A and clause (a) of sub- section (1) of section 269B of Chapter XXA of the Income-tax Act relating to acquisition of immovable properties in certain cases of transfer to counteract evasion of tax, an "Assistant Commissioner of Income-tax" was referred to as a competent authority for the purposes of performing the functions under the Chapter. This referred to the "Assistant Commissioner of Income-tax", before changes in the designations of income-tax authorities were made by the Amending Act, 1987. However, as a result of changes in the designations made by the Amending Act, 1987, with effect from 1-4-1988, the term "Assistant Commissioner" now means an "Income-tax Officer Group A". Since it was always intended that an officer of the rank of a "Deputy Commissioner" (wh ..... 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Para 10.8], section 249(4) [Para 10.10], section 253 (Para 10.11), section 255(3) [Para 10.12], and insertion of a new section 279B (Para 10.14) come into force with effect from 1-4-1989. 10.17 The following amendments come into force retrospectively, with effect from the dates mentioned against them:- (i) Amendment of section 190 [Item (i) of Para 10.8] 1-6-1988 (ii) Amendment of section 206C (Para 10.4) 1-6-1988 (iii) Amendment of sections 269A and 269B (Para 10.13) 1-4-1988 [Sections 10,13, 15, 29, 33, 34, 45 to 49 and 53 of the Amending Act, 1989] AMENDMENTS TO THE WEALTH-TAX ACT, 1957 AMENDMENTS CORRESPONDING TO THE AMENDMENTS MADE IN THE INCOME-TAX ACT Table indicating the corresponding amendments 11.1 The Amending Act, 1989 has either inserted new provisions or made amendments to the existing provisions in the Wealth-tax Act relating to exemption to non-repatriable NRI Bonds, appeals to the Appellate Tribunal and production of evidence during prosecution proceedings, in order to make these provisions in line with the corresponding provisions in the Income-tax Act, as they have emerged after their amendments by the said Amending Act, 1989 and which have been discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SECURED OR INCURRED IN RESPECT OF ASSETS WHICH ARE EXEMPT UNDER CERTAIN PROVISIONS OF THE WEALTH-TAX ACT Amendment of the definition of 'net wealth' in section 2(m) 12.1 Clause (m) of section 2 of the Wealth-tax Act defines 'net wealth' to mean the aggregate value of the assets computed in accordance with the provisions of the Act minus the aggregate value of debts owned by the assessee on the valuation date. However, certain categories of debts are not deductible. Under the provisions of sub-clause (ii) of the said clause (m), debts, which are secured on or which are incurred in relation to any property in respect of which wealth-tax is not chargeable, are not deductible from the net wealth. This provision led to contradictory interpretations under certain circumstances. For example, where the asset was only partially exempt under the provisions of sub-section (1A) of section 5, which restricts exemptions under section 5(1) in respect of certain assets to Rs. 5,00,000, two views were taken regarding deductibility of debts secured or incurred in relation to such an asset. One view was that the entire amount of the debt was not deductible, while the other view was that only the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ividual, while under the provisions of clause (b) of the said sub-section (1), the value of interest of a partner or a member in the firm or association of persons, as the case maybe, is included in the net wealth of that partner or member. Under the old provisions of the said sub-section (1), both its clauses (a) and (b) were governed by the same opening words which referred to an "individual". This let to an interpretation that clause (b) dealing with inclusion of the value of interest of a partner or a member in the firm or association of persons in his net wealth was applicable to individuals only. This left a lacuna in the provisions, because clause (b) is intended to apply to all partners and members, whether they are individuals or Hindu undivided families. 13.2 Further, the old provisions of the said clause (b) of sub-section (1) of the section made no provision for including the value of the interest of a minor admitted to the benefits of partnership in a firm in the net wealth of either of the parents of the minor. This was again a lacuna in the Wealth-tax Act, because in the Income-tax Act such provisions are contained in section 64(1). Also, some consequential amendme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E OF ASSETS PURSUANT TO INCLUSION OF RULES FOR VALUATION IN SCHEDULE III TO THE WEALTH-TAX ACT Substitution of new section for section 7 dealing with determination of the value of assets 14.1 Under the old provisions of section 7 of the Wealth-tax Act, the value of any asset, other than cash, was taken, subject to any rules made in this behalf, as the price it would fetch if sold in the open market on the valuation date. Sub-sections (1) to (3) contained provisions for determination of this "open market value" of the asset. Sub-section (4) gave an option to the assessee, in the case of a house belonging to him and exclusively used by him for residential purposes, to opt for the "open market value' on the valuation date next following the date on which he became the owner of the house or on the valuation date relevant to the assessment year 1971-72, whichever valuation date was later. 14.2 The rules for valuation of various assets have now been incorporated by the Amending Act, 1989, in the Wealth-tax Act itself as Schedule III to the Act. The rules contained in the said Schedule III provide for the method of valuation of different categories of assets (refer Paras 18.1 to 18.33) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 18B 15.1 Under the old provisions of sub-section (1) of section 18B of the Wealth-tax Act, the Commissioner was empowered to reduce or waive the following penalties:-- (i) Penalty under section 18(1)(i) for failure to furnish return of wealth under section 14(1). (ii) Penalty under section 18(1)(iii) for concealment of wealth or furnishing inaccurate particulars of wealth. 15.2 The provisions regarding levy of penalty for default in filing the return of wealth were omitted and replaced by charge of mandatory interest under a new section 17B inserted by the Amending Act, 1987, which is applicable from the assessment year 1989-90. Consequently, the Amending Act, 1989, has also made the following amendments to section 18B of the Wealth-tax Act: (i) Under the amended sub-section (1) of the section, only penalty leviable under section 18(1)(iii) for concealment of wealth, etc., can be reduced or waived. (ii) A new section (6) has been inserted in the section to provide that the provisions of the section, as they stood immediately before their amendment by the Amending Act, 1989, shall apply up to assessment year 1988-89. This means that the amended provisions of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the case justify it. 16.3 These amendments come into force with effect from 1-4-1989. [Section 70 and 77 of the Amending Act, 1989] AMENDMENTS TO REMOVE ANOMALIES RELATING FROM CERTAIN PROVISIONS OF THE AMENDING ACT, 1987 OF WITHDRAWAL THEREOF 17.1 The Amending Act, 1989 has amended certain sections of the Wealth-tax Act to remove some anomalies which had resulted from some provisions of the Amending Act, 1987, or on account of omission of certain provisions introduced by that Amending Act. The sections so amended and the nature of the amendments are indicated below: (i) Section 6 dealing with exclusion of assets and debts outside India in the case of certain non-residents - Explantation 1A of this section, which refers to "clause (4A) of section 10" of the Income-tax Act, has been amended to replace this reference by a reference to "sub-clause (ii) of clause (4) of section 10", as the said clause (4A) of section 10 had been renumbered as sub-clause (ii) of clause (4) by the Amending Act, 1987. (ii) Section 11 dealing with jurisdiction of Assessing Officer and power to transfer cases - In sub-section (2) of section 11, which was substituted by the Amending Act, 1987, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... T [1980] 124 ITR 799 (Bom) and K. M. Mammen vs WTO [1983] 139 ITR 357 (Mad)], such interpretations made the rules for valuation ineffective. Therefore, in order to eliminate litigation on the subject and also to made the said rules mandatory so that there is certainty and uniformity in the matter of valuation of assets, the Amending Act, 1989 has incorporated the rules for valuation in the wealth-tax itself, by inserting a new Schedule III in the Act. Simultaneously section 7 has also been suitably amended (refer paras 14.1 to 14.3 ante). Rules 1B to 1D and 2 to 2-I of the Wealth-tax Rules, 1957 have been omitted. 18.2 It may also be pointed out that the rules for valuation of assets, as contained in the Wealth-tax Rules, 1957, did not provide for valuation of certain categories of assets like commercial house property, quoted equity shares or preference shares of companies, unquoted equity shares of investment companies, jewellery etc. Therefore, draft rules for valuation of these assets were notified for eliciting public opinion, as Draft Rules, 1986 - Notification No. 149(E), dated 31-3-1986. These Draft Rules also contained proposals for appropriate amendments in the existing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acquisition or the cost of construction plus the cost of any improvement thereto, if the value so determined is more than the value arrived at by the method of multiplying factor envisaged in the main rule and the first proviso. Third proviso to the rule, however, provides that the provisions of the second proviso shall not apply for determining the value of one house belonging to the assessee, even before the house is acquired or constructed after 31-3-1974, if the house is exclusively used by the assessee for his own residence throughout the period of 12 months immediately preceding the valuation date and the cost of acquisition or the cost of construction, as increased, in either case, by the cost of any improvement does not exceed,-- (a) Rs. 50 lakhs, where the house is situated at Bombay, Calcutta, Delhi or Madras. (b) Rs. 25 lakhs, where the house is situated at any other place. The effect is that the value of such a house shall be determined in the manner prescribed in the main rule 3 or the first proviso thereto, i.e.,by multiplying the net maintainable rent by the figure 12.5 or 10 or 8, as the case may be. This removes the hardship in the case of persons to acquire on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the value arrived at under rule 3 for unbuilt area of plot of land. Rule 7 provides for adjustments for unearned increase in the value of the land, where the house property is constructed on leasehold land and the terms of the lease entitle the Government or any local authority to claim and recover a specified part of the unearned increase in the value of the land at the time of the transfer of the house property. The provisions of rules 6 and 7 are on the same lines as the provisions of sub-rules (3) and (4) of the erstwhile rule 1BB. Cases where rule 3 shall not apply (rule 8) 18.14 Rule 8 mentions the cases where the provisions of rule 3 for valuation of house property shall not apply. The provisions of this rule are on the lines of sub-rule (5) of the erstwhile rule 1BB, with the modification that the valuation in such cases shall be done by the Assessing Officer in the manner laid down in rule 20 and for doing so the approval of the Deputy Commissioner will not be necessary. PART C : SHARES IN OR DEBENTURES OF COMPANIES(RULES 9 AND 13) Valuation of quoted shares and debentures of companies (rule 9) 18.15 Rule 9 provides for the method of valuation of quoted shares in or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... value determined in the manner laid down in that rule. However, where no dividend was paid by the company for three years or more, the percentage was varied from 82.5 per cent to 75 per cent depending upon the number of years for which dividend was not paid. Under the present provisions of rule 11, the value is determined in all cases at 80 per cent of the break-up value irrespective of whether the dividend has been paid or not. The method of determining the break-up value, however, remains the same as in the erstwhile rule 1D. (ii) The words 'market value' have been substituted by the word 'value'. Valuation of unquoted equity shares in investment companies (rule 12) 18.19 Rule 12 provides for the method of valuation of unquoted equity shares in investment companies as follows:-- (i) The valuation is made on the basis of the break-up value of the shares determined in the same manner as in rule 11. However, the full break-up value is taken into account, instead of 80 per cent taken while determining the break-up value under rule 11. (ii) Sub-rule (3) of rule 12 provides that for the purpose of determining the break-up value, the value of an asset disclosed in the balance-shee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the paid up value of such share or the value determined under sub-rule (2), whichever is higher. (ii) Sub-rule (2) provides the method for determining the value of such share for the purposes of sub-rule (1), as follows: (1) First arrive at the 'aggregate value of all the equity shares' in an interlocked company as follows: (a) In a case where 50 per cent or more of the gross total income of the company consists of income chargeable under the head 'Income from house property' multiply the 'maintainable profits', of the company by the fraction 100/8.5 (b) In the case of any other interlocked company, multiply the maintainable profits' of the company by the fraction 100/10. (2) Then divide the 'aggregate value of all the equity shares' so arrived at by the number of equity shares in that interlocked company. The resultant amount shall be the value of the unquoted equity share in that interlocked company. (iii) Sub-rule (3) provides the manner in which the 'maintainable profits' of the company for the above purpose shall be computed. The maintainable profits are computed on the basis of average of the book profits of the company for five accounting years immediately preceding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been disclosed in the balance-sheet corresponding to the erstwhile rule 2F of the Wealth-tax Rules, 1957. Consequently, if any debt owed by the assessee and relating to the business is not disclosed in the balance-sheet, no deduction for the same shall now be allowed while determining the net value of the assets of business. PART E : INTEREST IN FIRM OR ASSOCIATION OF PERSONS [RULES 15 AND 16] 18.25 Rules 15 and 16 provide for the manner in which the value of the interest of a partner or a member in the firm or association of persons is to be determined. The provisions of these rules are on the same lines as those of the erstwhile rule 2 of the Wealth-tax Rules, 1957, with minor modification. The modification is that it has now been clarified in the rule 16 as to how the assets held by the firm or associations of persons, which are exempt under sub-sections (1) and (1A) of section 5, are to be treated. A proviso to rule 16 provides that in determining the net wealth of the firm or association of persons (for purposes of determining the interest of a partner or a member therein), exemptions under sub-sections(1) and (1A) of section 5, shall not to be taken into account, i.e., no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he concerned subsequent assessment year shall be substituted for the value of such gold or silver or alloy on the valuation date relevant to the first assessment year. (b) Where any jewellery or part of jewellery is sold or otherwise disposed of by the assessee, or any jewellery or part of jewellery is acquired by him, on or before the valuation date relevant to the concerned subsequent assessment year, the value of the jewellery determined for the first assessment year shall be reduced or increased, as the case may be. 18.30 The definitions of the terms 'gold' and 'gold ornament' are given in rule 2(4) and (5). PART H : RESIDUARY [RULES 20 AND 21] Valuation of assets in other cases (rule 20) 18.31 Rule 20 provides that the value of an asset, other than cash, being an asset which is not covered by rules 3 to 19, shall be estimated to be the price which, in the opinion of the Assessing Officer, it would fetch if sold in the open market on the valuation date. However, where the valuation of any asset is referred by the Assessing Officer to the Valuation Officer under section 16A, the value of such asset shall be estimated to be the price which, in the opinion of the Valuation Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mption from gift-tax in respect of non-repatriable NRI Bonds. 3. 81 6 7 of the W.T. Act Substitution of new section for section 6 dealing with determination of the value of gifts, pursuant to insertion of a new Schedule II in the Gift-tax Act. 4. 82 10 11 of the W.T. Act Amendment in section 10 to set right an incorrect reference to sub-section (5) of section 127 of the Income-tax Act, instead of to sub-section (4). 5. 89 25(1) (i) 26(1) of the W.T. Act. (ii) 253 (1)(c) of the I.T. Act. Consequential amendment of section 25 relating to appeals to the Appellate Tribunal from orders of the Chief Commissioner or Commissioner. 6. 91 34 35 of the W.T. Act. Consequential amendment of section 34 dealing with rectification of mistake, pursuant to omission of section 22A. 7. 92 35K (i) 36 of the W.T. Act. (ii) 279B of the I.T. Act Insertion of a new section 35K to dispense with the necessity of production of original records and documents in evidence during prosecution proceedings. 8. 94 Schedule II Schedule III to the W.T. Act. Insertion of a new Schedule II containing rules for determining the value of property gifted. Note: The amendments indicated at Ser ..... X X X X Extracts X X X X X X X X Extracts X X X X
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