FINANCE ACT, 1987 - CIRCULAR NO. 495, DATED 22-9-1987
| SECTION/SCHEDULE | PARTICULARS |
| Finance Act | |
| 2/1st Sch. | Rate structure 4-9 |
| Income-tax Act | |
| 2(22)(e) | Definition of �dividend� 10.2 |
| 2(24)/36(1) | Measures for penalising employers who misutilise |
| (va)/43B, 56(2) | contributions to provident fund or any fund set up |
| (ic)/57(ia) | under provisions of Employees� State Insurance Act, |
| 1948, or any other fund for welfare of employees 12 | |
| 2(29 A)/ | New provisions relating to set off and carry forward |
| 2(42B)/ | of long-term capital losses 13 |
| 70(1) & (2)/71/ | |
| 72(1)/74 | |
| 2(42A) | Tax incentive for investment in shares 14 |
| 2(47) | Definition of �transfer� widened to include certain transactions 11 |
| 10(10C) | Exemption of compensation received by employees of public sector companies on voluntary retirement 15 |
| 10(15)(ii) | Modification in nomenclature for exemption of income-tax on certain deposits with post office 16 |
| 10(15)(iv) | Exemption of interest on bonds issued by certain public sector undertakings 17 |
| 10(17) | Modification of provision relating to exemption of allowances received by Members of Parliament 18 |
| 10A | Clarificatory amendment to extend tax holiday to units in Free Trade Zones 19 |
| 27 | Enlarging meaning of �ownership� of house property 23 |
| 32AB | Modification of provisions relating to investment deposit account 20 |
| 44BB | New provisions for computation of taxable income from activities connected with exploration of mineral oils 21 |
| 44BBA | Simplification of computation of income in respect of foreign airlines 22 |
| 45/47/49 | Capital gains on transfer of firm�s assets to partners and vice versa and on transfer by way of compulsory acquisition 24 |
| 48/53 | Modification of provisions relating to computation of capital gains 25 |
| 54/54B/ | New scheme for deposits for claiming exemption |
| 54D/54E | from capital gains 26 |
| 54G | Exemption of capital gains on shifting of industrial undertakings from urban areas 27 |
| 55(1), (2) | Capital gains arising on transfer of goodwill 28 |
| 80C(2), (4), | Modification of provisions relating to deduction in |
| (7), (8) | respect of subscription to any security of Central Government specified by notification in this behalf and any payments made for purchase or construction of residential house 29 |
| 80CC(3), (5) | Tax incentive for investment in certain new shares 30 |
| 80CCA | New provisions relating to national savings scheme to augment savings 31 |
| 80G | Modification of the provisions relating to deduction in respect of donations to certain funds, etc. 32 |
| 80-O | Modification of provisions relating to deduction in respect of royalties, etc., from certain foreign enterprises 33 |
| 80RRA | Modification of provisions in respect of remuneration received for services rendered outside India 34 |
| 80U | Enhancing deduction in case of totally blind or physically handicapped persons 35 |
| 104 to 109 | Levy of additional tax on certain closely-held companies withdrawn 10 |
| 115J | New provisions to levy minimum tax on book profit of certain companies 36 |
| 192(2), (2A), | Modification of scope of deduction of tax at source |
| (2B) | from salaries 37 |
| 194/194A/ | Modification of provisions relating to tax deduction at |
| 194D/195/ | source from dividend, interest, insurance commission |
| 195A/197/ | and payments to non-residents 38 |
| 206/285/286 | |
| 203 | Amendment of provisions relating to issue of certificate for tax deduction 39 |
| 203A/272BB/ | New provisions relating to allotment of tax deduction |
| 273B | account number 40 |
| 245A/245B/ | Modification of the provisions relating to settlement |
| 245BA to | of cases 41 |
| 245BD/245C, | |
| 245D/245E/ | |
| 245F/245H/ | |
| 245HA/245K/ | |
| 245M | |
| 293 | Bar of suits in civil courts to set aside or modify any order passed 42 |
| 11th Sch. | Non-priority products to include �aerated waters� using synthetic essences, and to exclude computers 43 |
| WEALTH-TAX ACT | |
| 2(m) | Enlarging meaning of house property - consequential amendment to correspond to amended provisions in Income-tax Act 23.3 |
| 5(1)(xxvb) | Exemptions of deposits in National Savings Scheme subject to overall limit of Rs. 5 lakhs 31.1 |
| 22A/22B/ | Modification of provisions relating to settlement of |
| 22BA to | cases on lines similar to Income-tax Act 41.6 |
| 22BD/22C/ | |
| 22D/22F/ | |
| 22H/22HHA/ | |
| 22K/22M | |
| 31 | Modification of provisions relating to waiver of interest 44 |
| 43 | Bar of suits in civil courts to set aside or modify any order passed 42.2 |
| GIFT-TAX ACT | |
| 2(xii) | Enlarging meaning of house property corresponding to similar provisions in Income-tax Act 23.3 |
| 42 | Bar of suits in civil courts to set aside or modify any order passed 42.2 |
Rate Structure
Finance Act, 1987
Rates of income-tax in respect of incomes liable to tax for the assessment year 1987-88
4. In respect of incomes of all categories of taxpayers (corporate as well as non-corporate) liable to tax for the assessment year 1987-88, the rates of income-tax have been specified in Part I of the First Schedule to the Finance Act. These rates are the same as those laid down in Part III of the First Schedule to the Finance Act, 1986, for the purposes of computation of �advance tax�, deduction of tax at source from �Salaries� and retirement annuities payable to partners of registered firms engaged in specified professions and computation of tax payable in certain cases during the financial year 1986-87.
Finance Act, 1987
Rates for deduction of tax at source during the financial year 1987-88 from income other than �Salaries� and retirement annuities
5. The rates for deduction of income-tax at source during the financial year 1987-88 from incomes, other than �Salaries� and retirement annuities payable to partners of registered firms engaged in certain professions, have been specified in Part II of the First Schedule to the Finance Act. These rates apply to income by way of interest on securities, other categories of interest, dividends, insurance commission, winnings from lotteries and crossword puzzles, income by way of winnings from horse races and income of non-residents (including non-resident Indians) other than salary income.
Finance Act, 1987
Rates for deduction of tax at source from �Salaries�, computation of �advance tax� and charging of income-tax in special cases during the financial year 1987-88
6. The rates for deduction of tax at source from �Salaries� in the case of individuals during the financial year 1987-88 and also for computation of �advance tax� payable during the year in the case of all categories of taxpayers have been specified in Part III of the First Schedule to the Finance Act. These rates are also applicable for deduction of tax at source during the financial year 1987-88 from retirement annuities payable to partners of registered firms engaged in certain professions (such as chartered accountants, solicitors, lawyers, etc.) and for charging income-tax during the financial year 1987-88 on current incomes in cases where accelerated assessments have to be made, e.g., provisional assessment of shipping, profits arising in India to non-residents, assessment of persons leaving India for good during the financial year 1987-88, assessment of persons who are likely to transfer property to avoid tax, where an order has to be passed in a case of search and seizure for calculating the amount of tax on the estimated undisclosed incomes, etc.
Finance Act, 1987
Rates of tax applicable to individuals, Hindu undivided families, unregistered firms, etc., co-operative societies, registered firms and local authorities
7. In the case of individuals, HUFs, unregistered firms, etc., the rates of income-tax have been specified in Paragraph A of Part III of the First Schedule to the Finance Act. In the case of co-operative societies, registered firms and local authorities, the rates of income-tax have respectively been specified in Paragraph B, Paragraph C and Paragraph D of Part III of the First Schedule to the Finance Act. These rates are the same as those specified in the corresponding Paragraph of Part I of the First Schedule.
Finance Act, 1987
Rates of tax applicable to companies
8. In the case of companies, the rates of income-tax have been specified in Paragraph E of Part III of the First Schedule to the Finance Act. These rates are the same as specified in the corresponding Paragraph of Part I of the First Schedule to the Finance Act, 1986.
Finance Act, 1987
Partially integrated taxation of non-agricultural income with income derived from agriculture
9. As in the past, the Finance Act provides 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]
Amendments to Income-tax Act
FINANCE ACT, 1987
Definition of �Dividend�
[section 2(22) (e)]
10.1 Sections
104 to 109 relate to levy of additional tax on certain closely-held companies
(other than those in which the public are substantially interested) if they fail
to distribute a specified percentage of their distributable profits as
dividends. These provisions had lost much of their relevance with the reduction
of the maximum marginal rate of personal tax to 50 per cent, which is lower than
the rate for corporation tax on closely-held companies. Sections 104 to 109
have, therefore, been omitted by the Finance Act, 1987.
FINANCE ACT, 1987
10.2 With
the deletion of sections 104 to 109 there was a likelihood of closely-held
companies not distributing their profits to shareholders by way of dividends but
by way of loans or advances so that these are not taxed in the hands of the
shareholders. To forestall this manipulation, sub-clause (e) of clause (22)
of section 2 has been suitably amended. Under the existing provisions, payments
by way of loans or advances to shareholders having substantial interest in a
company to the extent to which the company possesses accumulated profits is
treated as dividend. The shareholders having substantial interest are those who
have a shareholding carrying not less than 20 per cent voting power as per the
provisions of clause (32) of section 2. The amendment of the definition
extends its application to payments made (i) to a shareholder holding not
less than 10 per cent of the voting power, or (ii) to a concern in which
the shareholder has substantial interest. �Concern� as per the newly insertedExplanation
3(a) to section 2(22)
means a HUF or a firm or an association of persons or a body of individuals or a
company. A shareholder having a substantial interest in a concern as per part (b)
ofExplanation 3 is deemed to
be one who is beneficially entitled to not less than 20 per cent of the income
of such concern.
FINANCE ACT, 1987
10.3 The
new provision would, therefore, be applicable in a case where a shareholder has
10 per cent or more of the equity capital. Further, deemed dividend would be
taxed in the hands of a concern where all the following conditions are satisfied
:
(i) where
the company makes the payment by way of loans or advances to a concern ;
(ii) where
a member or a partner of the concern holds 10 per cent of the voting power in
the company ; and
(iii) where
the member or partner of the concern is also beneficially entitled to 20 per
cent of the income of such concern.
With a view to avoid the hardship in cases
where advances or loans have already been given, the new provisions have been
made applicable only in cases where loans or advances are given after 31st May,
1987.
These amendments will apply in relation to
assessment year 1988-89 and subsequent years.
[Sections 3(a) and 41 of the Finance
Act]
FINANCE ACT, 1987
Definition of �transfer�
widened to include certain transactions
11.1 The
existing definition of the word �transfer� in section 2(47) does not
include transfer of certain rights accruing to a purchaser, by way of becoming a
member of or acquiring shares in a co-operative society, company, or association
of persons or by way of any agreement or any arrangement whereby such person
acquires any right in any building which is either being constructed or which is
to be constructed. Transactions of the nature referred to above are not required
to be registered under the Registration Act, 1908. Such arrangements confer the
privileges of ownership without transfer of title in the building and are a
common mode of acquiring flats particularly in multistoreyed constructions in
big cities. The definition also does not cover cases where possession is allowed
to be taken or retained in part performance of a contract, of the nature
referred to in section 53A of the Transfer of Property Act, 1882. New
sub-clauses (v) and (vi) have been inserted in section 2(47)
to prevent avoidance of capital gains liability by recourse to transfer of
rights in the manner referred to above.
FINANCE ACT, 1987
11.2 The
newly inserted sub-clause (vi) of section 2(47) has brought into
the ambit of �transfer�, the practice of enjoyment of property rights through
what is commonly known as Power of Attorney arrangements. The practice in such
cases is adopted normally where transfer of ownership is legally not permitted.
A person holding the power of attorney is authorised the powers of owner,
including that of making construction. The legal ownership in such cases
continues to be with the transferor.
FINANCE ACT, 1987
11.3 These
amendments shall come into force with effect from 1-4-1988 and will accordingly
apply to the assessment year 1988-89 and subsequent years.
[Section 3(g) of the Finance Act]
JUDICIAL ANALYSIS
EXPLAINED IN
- In CIT v. Reliance
International Corpn. (P.) Ltd. [1994]
73 Taxman 679 (Delhi) it was observed that the CBDT in its Circular No. 495,
dated 22-9-1987 had also clarified that the amendment of section 2(47) should
come into force with effect from 1-4-1988 and would, accordingly, apply to the
assessment year 1988-89 and subsequent year.
FINANCE ACT, 1987
Measures of penalising
employers who misutilise contributions to the provident fund or any fund set up
under the provisions of the Employees� State Insurance Act, 1948, or any other
fund for welfare of employees
12.1 The
existing provisions provide for a deduction in respect of any payment by way of
contribution to a provident fund or superannuation fund or any other fund for
welfare of employees in the year in which the liability is actually discharged
[section 43B]. The effect of the amendment brought about by the Finance Act, is
that no deduction will be allowed in the assessment of the employer(s) unless
such contribution is paid to the fund on or before the �due date�. Due date
means the date by which an employer is required to credit the �contribution� to
the employee�s account in the relevant fund under the provisions of any law or
term of contract of service or otherwise.
[Explanation to
section 36(1)(va) of the Finance Act]
FINANCE ACT, 1987
12.2 In
addition, contribution of the employees to the various funds which are deducted
by the employer from the salaries or wages of the employees will be taxed as
income [insertion of new sub-clause (x) in clause (24) of section
2] of the employer, if such contribution is not credited by employer in the
account of the employee in the relevant fund by the �due date�. Where such
income is not chargeable to tax under the head �Profits and gains of business or
profession�, it will be assessed under the head �Income from other sources�.
FINANCE ACT, 1987
12.3 Payment
by way of tax on duty, liability for which has accrued in the previous year,
will be allowed as a deduction if it is made by the due date of furnishing the
return under section 139(1) in respect of the assessment year to which the
aforementioned previous year relates.
FINANCE ACT, 1987
12.4 These
amendments will take effect from 1-4-1988 and will, accordingly, apply from the
assessment year 1988-89 and subsequent years.
[Sections 3(b), 9, 10, 26 and 27 of
the Finance Act]
FINANCE ACT, 1987
New provisions relating to
set off and carry forward of long-term capital losses
13.1 Under
the existing provisions, losses from the transfer of short-term capital assets
are allowed to be set off against any capital gains, whether short-term or
long-term or against income under any other head ; losses arising from transfer
of long-term capital assets are, however, allowed to be set off only against
long-term capital gains. The rationale of this lies in the fact that long-term
capital gains are subject to lower incidence of tax. The long-term capital
losses can be carried forward separately for four years. In case of short-term
capital loss, the carry forward is allowed for 8 years.
FINANCE ACT, 1987
13.2 The
distinction between short-term and long-term capital assets though conforming to
the principle of equity of taxation has led to complications. To make the
provisions simpler, this distinction has been done away with by insertion of
sub-clauses (29 A), (29B) and (42B) in section 2 of the
Income-tax Act, 1961, substitution of sections 71 and 74 and amendment of
sections 70 and 72. To ensure uniform treatment of capital losses and capital
gains, losses arising on transfer of long-term capital assets (after they are
scaled down by the same percentage of deduction as long-term capital gains)
would be treated as any other losses so that they can be set off against income
under any other head in the same year and if not fully set-off may be carried
forward. The distinction between the carry forward of short-term capital losses
and long-term capital losses has also been removed and all capital losses would
be carried forward for 8 succeeding years and set off only against capital
gains, if any, in those years.
FINANCE ACT, 1987
13.3 The
above amendments to sections 2, 70, 71 and 74 of the Income-tax Act shall come
into force with effect from 1-4-1988 and will, accordingly, apply in relation to
the assessment year 1988-89 and subsequent years.
FINANCE ACT, 1987
13.4 Transitory
provisions with regard to carry forward of capital losses in relation to
assessment year 1987-88 and earlier assessment years have been provided for in
sub-section (3) of section 74. This provides that short-term capital losses
computed in respect of assessment year 1987-88 or any earlier assessment year(s)
shall be carried forward and set off under the head �Capital gains� assessable
for assessment year 1988-89 or any subsequent assessment year(s). If the loss is
short-term capital loss and it cannot be fully set off, it would be carried
forward to the following assessment year(s). This short-term capital loss,
however, would not be carried forward for more than 8 years succeeding the
assessment year in which the loss was first computed.
FINANCE ACT, 1987
13.5 In
respect of long-term capital loss relating to the period to the date of coming
into effect of the new section 74, this would be carried forward and set off
against income under the head �Capital gains� assessable for that assessment
year. Carry forward of loss would not be allowed beyond the 4th assessment year
immediately succeeding the assessment year for which the loss was first
computed.
[Sections 3(c), 3(f), 28, 29,
30, 31 of the Finance Act]
FINANCE ACT, 1987
Tax incentive for investment
in shares
14.1 Under
the existing provisions of section 2(42A) of the Income-tax Act,
short-term capital asset means the capital asset held by the taxpayer for a
period of 36 months or less, immediately preceding the date of its transfer.
With a view to providing tax incentive for investment in shares of certain new
companies, the amendment seeks to provide that in the case of a share held in a
company, the share shall be treated as a short-term capital asset if it is held
by the assessee for 12 months or less immediately preceding the date of its
transfer.
FINANCE ACT, 1987
14.2 This
amendment will take effect from 1-4-1988 and will, accordingly, apply in
relation to the assessment year 1988-89 and subsequent years.
[Section 3(e) of the Finance Act]
FINANCE ACT, 1987
Exemption of compensation
received by employees of public sector companies on voluntary retirement
15.1 At
present, under section 10(10B), any compensation received by a workman at
the time of his retirement is exempted up to the amount calculated in accordance
with section 25F of the Industrial Disputes Act or Rs. 50,000, whichever is
less. The limit is, however, not applicable in respect of compensation received
under certain schemes approved by the Central Government.
FINANCE ACT, 1987
15.2 A
number of public sector undertakings have formulated voluntary retirement
schemes for their employees. With a view to extend relief of such employees, the
Finance Act, 1987, by introducing new clause (10C) in section 10,
provides exemption in respect of any payment received by them at the time of
their voluntary retirement in accordance with any scheme which the Central
Government may approve having regard to the economic viability of the public
sector company and other relevant circumstances. This exemption will be
available to any employee whether a workman or an executive.
FINANCE ACT, 1987
15.3 This
amendment shall come into force with effect from1st April, 1987, and will,
accordingly, apply to the assessment year 1987-88 and subsequent years.
[Section 4(a) of the Finance Act]
FINANCE ACT, 1987
Modification in the
nomenclature for exemption of income-tax on certain deposits with post office
16.1 Section
10(15) of the Income-tax Act exempts within permissible limits interest
earned by assessees on certain deposits made with the Post Office Savings Banks.
The exemption covers interest earned on deposits made in the�
(i) Post
Office Savings Banks under the Post Office Savings Banks (Cumulative Time
Deposits) Rules, 1959 ; and
(ii) Public
Account under the Post Office (Savings Banks) Rules, 1965.
FINANCE ACT, 1987
16.2 The
rules regarding the above two Post Office Savings Accounts Rules have been
revised and as a consequence have been substituted by the Post Office
(Cumulative Time Deposits) Rules, 1981, and the Post Office Savings Accounts
Rules, 1981, respectively. The substitution has been made w.e.f. 1st April,
1982.
FINANCE ACT, 1987
16.3 Section
10(15) as a consequence has been amended with retrospective effect. It
now refers to the rules currently applicable for the rules which are now not
legally in force. The interest on deposits made in the Post Office Savings Banks
under these rules continue to qualify for exemption from income-tax.
FINANCE ACT, 1987
16.4 The
amendment is with the retrospective effect from 1st April, 1983, and will,
accordingly, apply to the assessment year 1983-84 and subsequent years. Interest
which may have accrued after 1st April, 1982, on the deposits made under the
revised rules would, therefore, be eligible for exemption.
[Section 4(b)(i) of the Finance
Act]
FINANCE ACT, 1987
Exemption from interest on
bonds issued by certain public sector undertakings
17.1 In
his Budget Speech for the year 1986-87, the Finance Minister had announced that
�the Government will introduce another series of Public Sector Bonds with a
tax-free return�. Pursuant to this announcement, certain public sector
enterprises such as Mahanagar Telephone Nigam Limited, National Thermal Power
Corporation and Indian Railway Finance Corporation had issued these tax-free
bonds.
FINANCE ACT, 1987
17.2 By
insertion of item (h) in sub-clause (iv) of clause (15) of
section 10, the Amendment Act provides that interest payable by the public
sector companies on certain specified bonds and debentures will not form part of
total income, subject to the conditions which the Central Government may specify
by notification, including the condition that the holder of such bonds or
debentures registers his name and holding with that company.
FINANCE ACT, 1987
17.3 The
amendment shall come into force with effect from 1st April, 1987, and will,
accordingly, apply to the assessment year 1987-88 and subsequent years.
[Section 4(b)(ii) of the
Finance Act]
FINANCE ACT, 1987
Modification of provisions
relating to exemption of allowances received by Members of Parliament
18.1 The
Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, conferred upon
the Central Government enabling power to exempt by notification the constituency
allowance and other such allowances of the Members of Parliament not exceeding
Rs. 1,250 per month. The Taxation Laws
(Amendment and Miscellaneous Provisions) Act, 1986 also extended the exemption
in respect of allowances received by a Member of any State Legislature up to Rs.
600 per month in the aggregate. The Central Government by notification in the
Official Gazette specified the allowances. The daily allowance received both by
the Members of Parliament and State Legislatures was also exempt.
FINANCE ACT, 1987
18.2 The
Finance Act, 1987, exempts any allowance received by Members of either House of
Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986.
This deduction is not subject to any notification or any monetary limits. The
provisions in relation to Members of the State Legislatures or Committees
thereof have not been altered.
FINANCE ACT, 1987
18.3 The
amendment shall come into force retrospectively from 1st April, 1986, and will,
accordingly, apply in relation to the assessment year 1986-87 and subsequent
years.
[Section 4(c) of the Finance Act]
FINANCE ACT, 1987
Clarificatory amendment to
extend tax holiday to the units in Free Trade Zones
19.1 Section
10A of the Income-tax Act provides a tax holiday to newly established industrial
undertakings in free trade zones. The tax exemption is available for five
consecutive assessment years out of the block of initial eight years. The
section refers to units engaged in �manufacture or production of articles or
things�. There are several cases of limits, set up in the free trade zones,
which only assemble or process imported components for export, the benefit to
the country being the value added. As an incentive for earning foreign exchange,
section 10A has been amended w.e.f. 1st April, 1981, when it was first
introduced, to clarify that units that merely assemble or process goods for
export would also get the benefit of the tax holiday. The amendment also covers
units which carry out recording of programmes on any disc, tape, perforated
media or other information storage device. In this regard, the Board had already
issued instruction in November 1986.
FINANCE ACT, 1987
19.2 The
amendment will come into force retrospectively from 1st April, 1981, and will,
accordingly, apply in relation to the assessment year 1981-82 and subsequent
years.
[Section 5 of the Finance Act]
FINANCE ACT, 1987
Modification of provisions
relating to investment deposit account
20.1 The
Finance Act, 1986 introduced section 32AB relating to investment deposit
account. The provisions apply in relation to the assessment year 1987-88 and
subsequent years. Under these provisions, an assessee is entitled to a deduction
of an amount up to 20 per cent of the profits of �eligible business or
profession�, if the said amount is either deposited with the Development Bank
within the period up to six months from the end of the previous year or before
furnishing the return, whichever is earlier, or is utilised during the previous
year for the purchase of a new ship, new aircraft, or new machinery or plant.
FINANCE ACT, 1987
20.2 Under
the provisions introduced by the Finance Act, 1986, the deduction under section
32AB is allowed after setting
off business loss, if any, brought forward from earlier years. To remove
hardship in cases where the assessee may not be able to avail of this benefit
because of brought forward losses from earlier years, the Finance Act, 1987, now
provides that the deduction will be allowed before setting off of brought
forward losses.
FINANCE ACT, 1987
20.3 The
existing provisions could conceivably lead to an interpretation that the
deduction is allowable both in the case of the firm and also in the case of the
partners in respect of income derived from business carried on by a firm. This
was never the intention of the provisions. It has, therefore, been clarified by
the Amending Act that the deduction under section 32AB shall be allowed in the
hands of the firm and not in the hands of the partners in respect of income
derived from the business of the firm.
FINANCE ACT, 1987
20.4 Under
the existing provisions, as introduced by the Finance Act, 1986, profits of
eligible business or profession, where separate accounts are maintained in
respect of such eligible business or profession, means profits as computed in
accordance with the Sixth Schedule to the Companies Act, 1956, as reduced by
depreciation computed under the provisions of section 32(1) and as increased by
the depreciation, debited in the audited profit and loss account. The Finance
Act, 1987 has introduced certain further adjustments for arriving at the amount
of �profits of eligible business or profession�. The amount arrived at above
will have to be increased by provision for taxation and reserves, etc., and
decreased by amounts withdrawn from provisions or reserves if such amounts are
credited to the profit and loss account.
FINANCE ACT, 1987
20.5 By
inserting a new sub-section (5A), the Amending Act also provides that the amount
deposited with the Development Bank in accordance with the Scheme shall not be
permitted to be withdrawn before the expiry of a period of 5 years from the date
of deposit, except for the purposes specified in the Scheme and in the following
circumstances :
(a) closure
of business ;
(b) death
of the taxpayer ;
(c) partition
of a HUF ;
(d) dissolution
of a firm ;
(e) liquidation
of company.
FINANCE ACT, 1987
20.6 The
Investment Deposit Account Scheme permits withdrawals for some purposes which
are even otherwise deductible under the Income-tax Act. In order to secure that
such assessees are not allowed deduction twice in respect of the same
expenditure, the Amending Act clarifies, that where any expenditure is made
wholly or partly by utilising the amounts credited to the taxpayer in the
deposit account, in respect of which deduction is allowed under section 32AB(1),
then such expenditure shall not be reduced under the other provisions of the
Act.
FINANCE ACT, 1987
20.7 Section
32AB(6) lays down the any amount withdrawn by an assessee from his account with
the Development Bank but not utilised in accordance with the scheme during the
previous year will be treated as income of the year during which the withdrawal
was made. There may be a situation where an assessee withdraws the amount and
utilises the same in accordance with the scheme for specified purposes within
the period permitted by the scheme but a part of such period may fall in the
next accounting year. In such cases, the effect of the existing provisions is
that though an assessee has utilised the amount in accordance with the scheme,
the amount will be added to the assessee�s income in the year in which the
withdrawal is made. To remove this anomaly, the Amending Act, 1987 has clarified
[section 32AB(6)] that in a case where the amount withdrawn has been utilised
for the specified purpose within the period specified in the scheme, such amount
would not form part of the income of the assessee in the previous year in which
the amount has been withdrawn.
FINANCE ACT, 1987
20.8 The
utilisation of the amount withdrawn is permitted in accordance with the
provisions of section 32AB and the scheme framed thereunder for the purpose of
purchasing a �new ship� or �new aircraft� or �new machinery or plant�. These
expressions have been defined in the Explanation to
section 32(1)(vi) of the Income-tax Act which has been deleted by the
Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect
from 1-4-1988. As a consequence, the Amending Act has amended section 32AB by
including the definition of the expressions �new ship�, �new aircraft� and �new
machinery or plant� in the section itself.
FINANCE ACT, 1987
20.9 These
amendments will come into force with effect from 1st April, 1987, and will,
accordingly, apply to the assessment year 1987-88 and subsequent years.
[Section 7 of the Finance Act]
FINANCE ACT, 1987
New provisions for computing
of taxable income from activities connected with exploration of mineral oils
21.1 A
number of complications are involved in the computation of taxable income of a
taxpayer engaged in the business of providing services and facilities in
connection with or supply of plant and machinery on hire, used or to be used in
the exploration for and exploitation of mineral oils. With a view to simplifying
the provisions, the Amending Act has inserted a new section 44BB which provides
for the determining of the income of such taxpayers at 10 per cent of the
aggregate of certain amounts which have been specified. This amount will include
the amounts received or due to be received in India on account of such services
or facilities or supply of plant and machinery.
FINANCE ACT, 1987
21.2 The
amendment will not apply to any income to which the provisions of sections 42,
44D, 115A or 293A of the Income-tax Act apply.
FINANCE ACT, 1987
21.3 This
amendment will come into force retrospectively from 1st April, 1983, and will
accordingly, apply in relation to the assessment year 1983-84 and subsequent
years.
[Section 11 of the Finance Act]
FINANCE ACT, 1987
Simplification in the
computation of income in respect of foreign airlines
22.1 Presently
the income of a non-resident engaged in the business of operation of aircraft is
computed after allowing deduction for certain expenses and statutory deductions.
This involves complications in determining the income accruing or arising in
India to such a person.
FINANCE ACT, 1987
22.2 With
a view to simplify the existing provisions, the Amending Act has inserted a new
section 44BBA which provides that the income from such business shall be
computed at a flat rate of 5 per cent of the amount received or receivable by or
on behalf of the taxpayer for carriage of persons, livestock, mail or goods from
any place in India and the amount received or deemed to be received within India
on account of such carriage from any place outside India.
FINANCE ACT, 1987
22.3 The
amendment will come into force with effect from 1st April, 1988 and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Section 12 of the Finance Act]
FINANCE ACT, 1987
Enlarging the meaning of
ownership of house property
23.1 The
Amending Act has extended the meaning of the expression �ownership� for the
purpose of computing income under the head �Income from house property�. The
expression �ownership� meaning legal ownership had the effect of excluding cases
where an assessee possessed all rights to an immovable property except the husk
of the title.
FINANCE ACT, 1987
23.2 The
practice of limited companies constructing multi-storeyed buildings and
allotting or leasing flats to the shareholders is quite prevalent these days. In
such a situation, though the limited company is the legal owner, the member
subscribers to the shares of the company to whom the flats are allotted are the
real owners who enjoy the income therefrom. In several States where the
Apartment Act has not been introduced there is a legal hurdle in transferring
the ownership of these flats to individual shareholders. Since the legal
ownership remains with the company, the income therefrom is taxed in their hands
under the head �Income from house property�. At the same time, since the
shareholder actually enjoys the income he is assessed under the head �Income
from other sources�. This has led to taxing the same income twice. There is
another practice whereby property is transferred to the purchaser after
receiving the consideration but without getting the sale registered under
section 54 of the Transfer of Property Act. This is done by executing power of
attorney in favour of a person who by virtue of that power of attorney enjoys
the property. In such cases, legally, the property remains with the registered
owner but for all practical purposes, the holder of the power of attorney is the
owner. A similar situation arises where possession of any immovable property is
allowed to be taken or retained in part performance of a contract of the nature
referred to in section 53A of the Transfer of Property Act, 1882. All these
types of transactions have the effect of transferring the house property in
fact, though not in law. With the extended definition of the expression
�ownership�, transactions covered by section 269UA of the Income-tax Act, 1961
(including transfer of property by power of attorney), shall be considered as
having the effect of transfer of title. The Amending Act by insertion of
sub-clauses (iii), (iiia) and (iiib) in section 27, covers
all the transactions referred to above for the purpose of determining the
ownership of the property for assessing income under the head �Income from house
property�.
FINANCE ACT, 1987
23.3 For
the sake of uniformity and consistency, consequential amendments in the
Wealth-tax Act and Gift-tax Act have also been made as a similar situation
exists in the allied statutes.
[Section 2(m) of the Wealth-tax Act
and section 2(xii) of the Gift-tax Act]
FINANCE ACT, 1987
23.4 The
Amending Act has shifted the liability to taxation, from the
legal owner to the real owner in respect of some transfers by introducing
deeming provisions. The question of taxing the legal owner,e.g., a
builder of multi-storeyed flats under the head �Income from house property�
would, consequently, not arise.
FINANCE ACT, 1987
23.5 This
amendment will come into force with effect from 1st April, 1988, and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Sections 3(g), 6, 75 and 90 of the
Finance Act]
FINANCE ACT, 1987
Capital gains on transfer of firms� assets
to partners and vice versa and by way of compulsory acquisition
24.1 One
of the devices used by assessees to evade tax on capital gains is to convert an
asset held individually into an asset of the firm in which the individual is a
partner. The decision of the Supreme Court in Kartikeya
V. Sarabhai v. CIT [1985]
156 ITR 509 has set at rest the controversy as to whether such a conversion
amounts to transfer. The Court held that such conversion fell outside the scope
of capital gain taxation. The rationale advanced by the Court is, that the
consideration for the transfer of the personal asset is indeterminate, being the
right which arises or accrues to the partner during the subsistence of the
partnership to get his share of the profits from time to time and on dissolution
of the partnership to get the value of his share from the net partnership
assets.
FINANCE ACT, 1987
24.2 With
a view to blocking this escape route for avoiding capital gains tax, the Finance
Act, 1987 has inserted new sub-section (3) in section 45. The effect of this
amendment is that profits and gains arising from the transfer of a capital asset
by a partner to a firm shall be chargeable as the partner�s income of the
previous year in which the transfer took place. For purposes of computing the
capital gains, the value of the asset recorded in the books of the firm on the
date of the transfer shall be deemed to be the full value of the consideration
received or accrued as a result of the transfer of the capital asset.
FINANCE ACT, 1987
24.3 Conversion
of partnership assets into individual assets on dissolution or otherwise also
forms part of the same scheme of tax avoidance. Accordingly, the Finance Act,
1987 has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961.
The effect is that profits and gains arising from the transfer of a capital
asset by a firm to a partner on dissolution or otherwise shall be chargeable as
the firm�s income in the previous year in which the transfer took place and for
the purposes of computation of capital gains the fair market value of the asset
on the date of transfer shall be deemed to be the full value of the
consideration received or accrued as a result of the transfer.
FINANCE ACT, 1987
24.4 As
a consequential measure, clause (ii) of section 47 has been omitted and
sub-clause (b) of clause (iii) of section 49(1) has been amended.
FINANCE ACT, 1987
24.5 Under
the existing provisions where capital gains accrue or arise by way of compulsory
acquisition of assets, the additional compensation is taken into consideration
for determining the capital gain for the year in which the transfer took place.
To provide for rectification of assessment of the year in which the capital gain
was originally assessed, section 155(7A) was introduced. The additional
compensation is awarded in several stages by different appellate authorities and
necessitates rectification of the original assessment at each stage. This causes
great difficulty in carrying out the required rectification and in effecting the
recovery of additional demand. Another difficulty which arises is in cases where
the original transferor dies and the additional compensation is received by his
legal heirs. In the latter type of cases, proceedings have to be initiated
against the legal heirs. Repeated rectification of assessments on account of
enhancement of compensation by different Courts often results in mistakes of
computation of tax.
FINANCE ACT, 1987
24.6 With
a view to removing these difficulties, the Finance Act, 1987 has inserted a new
sub-section (5) in section 45 to provide for taxation of additional compensation
in the year of receipt instead of in the year of transfer of the capital asset.
The additional compensation will be deemed to be income in the hands of the
recipient even if the actual recipient happens to be a person different from the
original transferor by reason of death, etc. For this purpose, the cost of
acquisition in the hands of the receiver of the additional compensation will be
deemed to be nil. The
compensation awarded in the first instance would continue to be chargeable as
income under the head �Capital gains� in the previous year in which the transfer
took place.
FINANCE ACT, 1987
24.7 These
amendments will come into force with effect from 1st April, 1988, and will,
accordingly, apply from the assessment year 1988-89 and subsequent years.
[Sections 13, 14 and 16 of the Finance Act]
JUDICIAL ANALYSIS
EXPLAINED IN - In Burlingtons�
Exports v. Asstt. CIT [1993]
45 ITD 424 (Bom. - Trib.) it was held that on a perusal of the Memorandum
explaining the provisions in the Finance Bill, 1987 (Paragraph 36) and the
Circular No. 495, dated 22-9-1987 (paragraphs 24.3 and 24.4) it is found that
section 45(4) is applicable to the transfer of a capital asset by a firm to a
partner on dissolution or otherwise.
FINANCE ACT, 1987
Modification in the
provisions relating to computation of capital gains
25.1 Under
the existing provisions of section 48 of the Income-tax Act computation of
capital gains resulting from the transfer of a capital asset is made by
deducting the cost of acquisition, the cost of improvement and the expenditure
incurred in connection with transfer from the consideration received on such
transfer. In addition to the aforesaid deductions, section 80T provides for
certain deductions in respect of long-term capital gains in the case of
non-corporate taxpayers. In the case of corporate taxpayers, concessional
treatment in respect of long-term capital gains is allowed not by way of
deduction but through lower rates prescribed in section 115.
FINANCE ACT, 1987
25.2 With
the amendment, the statutory deductions or concessions available in sections 80T
and 115 have been incorporated in section 48 itself. The present sections 80T
and 115 have been omitted.
FINANCE ACT, 1987
25.3 The
new scheme provides for 100 per cent deduction in all cases where the long-term
capital gain does not exceed Rs. 10,000. Where it exceeds Rs. 10,000, the rates
of deduction are as under :
|
Status of assessee |
Rates of deduction in respect
of long-term capital gains relating to buildings or
lands or any rights therein or
gold, buillion or jewellery hereinafter
called(Category I) |
Rates of deduction in respect of long-term
capital gains relating
to other capital assets
hereinafter called(Category
II) |
|
|
Rs. |
Rs. |
|
Company |
10,000 + 10% of balance |
10,000 + 30% of balance |
|
Any other assessee |
10,000 + 50% of balance |
10,000 + 60% of balance |
In a case where capital gains in relation to
both the categories of assets referred to above (i.e., Category I and Category
II) are chargeable under the head �Capital gains�, the manner of allowing
deduction of Rs. 10,000 has been prescribed in the first proviso to the newly
introduced section 48. The deduction of Rs. 10,000 will be first allowed against
the assets referred to above in Category I, and the balance, if any, against the
assets referred to in Category II.
FINANCE ACT, 1987
25.4 In
cases of compulsory acquisition, the threshold deduction will be restricted to a
total amount of Rs. 10,000 in relation to the initial compensation as well as
additional compensation received in subsequent years.
FINANCE ACT, 1987
25.5 The
above deductions referred to in section 48(2) will be given after providing for
the exemptions specified in sections 54, 54B, 54D, 54E, 54F and 54G.
FINANCE ACT, 1987
25.6 The
exemptions provided in sections 53, 54 and 54F in respect of capital gains which
are hitherto allowed only to individuals has now been extended to Hindu
undivided families also.
FINANCE ACT, 1987
25.7 These
amendments will take effect from 1st April, 1988, and will, accordingly, apply
in relation to the assessment year 1988-89 and subsequent years.
[Sections 15 and 18 of the Finance Act]
FINANCE ACT, 1987
New scheme for deposits in
respect of exemption from capital gains
26.1 Under
the existing provisions of sections 54, 54B, 54D and 54F, long-term capital
gains arising from the transfer of any immovable property used for residence,
land used for agricultural purposes, compulsory acquisition of lands and
buildings and other capital assets are exempt from income-tax if such gains are
reinvested in new assets within the time allowed for the purpose. The original
assessment needs rectification whenever the taxpayer fails to acquire the
corresponding new asset.
FINANCE ACT, 1987
26.2 With
a view to dispense with such rectifications of assessments, the amendments made
to sections 54, 54B, 54D and 54F provide for a new scheme for deposit of amounts
meant for reinvestment in the new asset. After the aforementioned amendments,
where the amount of capital gains or the net consideration, as the case may be,
is not appropriated or utilised by the tax-payer for acquisition of the new
asset before the date for furnishing the return of income, it shall be deposited
by him on or before the due date of furnishing the return of income, under
section 139(1) in an account with a bank or institution and utilised in
accordance with a scheme framed by the Central Government in this regard. The
amount already utilised together with the amounts of deposit shall be deemed to
be the amount utilised for the acquisition of the new asset. If the amount
deposited is not utilised fully for acquiring the new asset within the period
stipulated, the capital gain relatable to the unutilised amount shall be treated
as the capital gain of the previous year in which the period specified in these
provisions expires. In such cases, the threshold deduction of ten thousand rupees
as well as the deduction under section 53 will not be admissible. Further, the
taxpayer shall be entitled to withdraw such amount in accordance with this
scheme. This scheme will be applicable in relation to the new section 54G also.
FINANCE ACT, 1987
26.3 The
following examples illustrate as to how the amended provisions relating to the
new sections for deposit will be applied :
|
|
Rs. (in
lakhs) |
|
1. Sale
consideration (date of sale 2-6-1987) |
10 |
|
2.
Cost of acquisition (date 1-5-1983) |
3 |
|
3.
Investment in construction of the new property
by due date of filing the return for the
assessment year 1988-89 |
4 |
|
Capital gain |
7 |
|
SITUATION 1 : |
|
|
Where no deposit in accordance with the scheme
is made by the taxpayer |
|
|
- Sale consideration |
10 |
|
- Cost of acquisition [to be allowed under
section 48(1)(a)] |
3 |
|
Balance |
7 |
|
- Deduction under section 54(1)(i) |
4 |
|
Balance |
3 |
|
- Deduction under section 53 : 7
� 2/10 |
1.4 |
|
Balance |
1.60 |
|
- Deduction under section 48(2) : Rs. 10,000 +
Rs. 75,000 |
0.85 |
|
Net capital gain liable to tax in the assessment
year 1988-89 |
0.75 |
|
SITUATION 2: |
|
|
Amount deposited as per scheme by the due date
of filing the return for the assessment year
1988-89 |
3 |
|
Hence, amount deemed utilised for the
acquisition of new asset |
7 |
|
Capital gain liable for tax for the year 1988-89
: |
|
|
(i) If the amount of Rs. 3 lakhs is
utilised in the construction by 2-6-1990,
capital gain in the assessment year 1991-92 |
Nil |
|
(ii) If the amount of Rs. 3 lakhs not
utilised in the construction of the property,
capital gain for the assessment year 1991-92 |
Nil |
|
Amount of deposit |
3 |
|
Less :
Deduction under section 48(2) (initial deduction
of Rs. 10,000 not being allowed), 50% of the
amount |
1.5 |
|
Net capital gain charged to tax in the year
1991-92 |
1.5 |
26.4 These
amendments will take effect from 1st April, 1988, and will, accordingly, apply
in relation to the assessment year 1988-89 and subsequent years.
[Sections 19, 20, 21 and 23 of the Finance
Act]
FINANCE ACT, 1987
Exemption of capital gains on
shifting of industrial undertakings from urban areas
27.1 Under
section 280ZA, if a company owning an industrial undertaking shifts the
undertaking from an urban area, it qualifies to receive a tax credit certificate
in respect of capital gains arising from the transfer of plant, machinery, etc.
This provision has been omitted with effect from 1-4-1988 by the Finance Act.
FINANCE ACT, 1987
27.2 With
an intent to promote decongestion of urban areas as also balanced regional
growth, the newly inserted section 54G exempts capital gains on transfer of
plant, machinery, land, building, etc., used for the purposes of the business of
industrial undertaking. The transfer must be effected in the course of, or in
consequence of, shifting of the industrial undertaking from an urban to a
non-urban area. Capital gains would be exempt, to the extent it is utilised
within a period of one year before or three years after the date of transfer in�
(i) acquiring
new plant, machinery, land, building, etc., for the purposes of the business of
the undertaking in the area to which it is shifted ;
(ii) incurring
expenses in the purchase of a new plant and machinery, etc., and in the shifting
of the establishment of the undertaking ; and
(iii) incurring
other expenses as would be specified in a scheme to be drawn up by the Central
Government. The exemption on capital gains will be available only if the
industrial undertaking is shifted to a non-urban area within a period of one
year before or three years after the date of transfer of the plant, machinery
etc., referred to above.
FINANCE ACT, 1987
27.3 The
new scheme for deposit of amounts for reinvestment of capital gains within the
specified period will also be applicable to gains arising from the transfer of
plant, machinery, etc., effected in the course of, or in consequence of the
shifting of industrial undertakings from urban to non-urban areas.
FINANCE ACT, 1987
27.4 The
benefit of exemption under section 54G will be available for shifting of
integrated independent units of the industrial undertaking, from an urban to a
non-urban area. For example, in the textile industry, if a distinct part of the
industrial undertaking like a spinning unit is shifted from an urban to
non-urban area, without shifting the weaving unit, the exemption provided for in
section 54G will still be allowable.
FINANCE ACT, 1987
27.5 These
amendments will take effect from 1st April, 1988 and will, accordingly, apply in
relation to the assessment year 1988-89 and subsequent years.
[Section 24 of the Finance Act]
FINANCE ACT, 1987
Capital gains arising on
transfer of goodwill
28.1 In
principle, the gains arising on transfer of goodwill amount to capital gains
liable to tax. The judicial view, however, has been that it is only where an
asset costs something to an assessee in terms of money, that the provisions
relating to levy of capital gains tax can apply. Goodwill being a self-generated
asset, not costing anything in terms of money, has been held to be outside the
purview of capital gains tax - CIT v. B.C.
Srinivasa Setty [1981]
128 ITR 294 (SC). Even in a case where an assessee transferred goodwill which he
had acquired earlier on payment of a price, the gain from such transfer was held
by a High Court to be not taxable, on the ground that the cost of improvement in
respect of this asset could not be ascertained in terms of money.
FINANCE ACT, 1987
28.2 The
Finance Act, 1987 by amending section 55 has provided for the method of
computing the cost of acquisition as well as the cost of improvement, where
goodwill is transferred. Where goodwill is purchased by the transferor the cost
of acquisition will be taken to be the purchase price and in all other cases it
shall be taken to be nil. The
cost of improvement in either case would be taken to be nil.
FINANCE ACT, 1987
28.3 The
intention in bringing to tax the capital gains on transfer of goodwill is only
to cover those cases where goodwill is actually transferred. Those cases where
the transfer is notional, for example, when a new partner is admitted to a firm,
would not be covered by the amendment. The new provisions will also not apply to
professional firms.
FINANCE ACT, 1987
28.4 The
amendment shall come into force with effect from 1st April, 1988, and will,
accordingly, apply to the assessment year 1988-89 and subsequent years.
[Section 25 of the Finance Act]
FINANCE ACT, 1987
Modification of the
provisions relating to deduction in respect of certain payments
29.1 With
a view to providing an incentive for construction and purchase of new
residential houses, the provisions of section 80C have been amended on the
following lines :
(i) subject
to overall qualifying limit of Rs. 40,000 a deduction will be allowed in respect
of any payment made towards the cost of any new residential property,
construction of which is completed after 31-3-1987 ;
(ii) the
qualifying amount in this mode of payment will be limited to an amount of Rs.
10,000 ;
(iii) the
payment towards cost will include�
(a) any
instalment or part payment made under a self-financing or any other scheme of
any development authority, housing board or any authority engaged in the
construction and sale of residential accommodation on ownership basis ;
(b) any
instalment or part payment of the amount due to any company or a co-operative
society of which the assessee is a share-holder or member towards the cost of
the house property allotted to him ;
(c) any
repayment of loans borrowed by taxpayer from the Government or any Bank or Life
Insurance Corporation of India and certain categories of public companies,
co-operative societies and institutions engaged in the business of providing
long-term finance for construction or purchase of houses in India ;
(d) any
repayment of loan borrowed from the employer if the employer happens to be a
public company or a public sector company as per definition newly inserted by
Amending Act [Section 2(36A)] ;
(e) stamp
duty, registration fee and other expenses incurred for the purpose of the
purchase of house, etc. ;
(iv) the
following payments, however, do not qualify for deduction :
(a) cost
of share or initial deposit for the cost of land (except where the consideration
for the purchase of house property is a composite amount and the cost of land
cannot be separately ascertained) or the cost of any addition or alteration ;
(b) any
expenditure in respect of which a deduction is allowable under section 24 ;
(v) if,
for any reason, any instalment or part payment made in advance in respect of
which deduction has been claimed is refunded, the deduction already allowed will
be deemed to be the income of the assessee chargeable to tax under the head
�Income from other sources� of the year in which the money was received back. In
addition, no deduction would be allowed in respect of any payment made during
that year ;
(vi) it
is necessary for the assessee to hold the property for a minimum period of 5
years from the end of the year in which the possession was taken. In case of
transfer of such property before the period of 5 years the total amount of the
deduction allowed to him under these provisions will be deemed to be the
assessee�s income of the year in which the property is transferred and shall be
chargeable to tax under the head �Income from other sources�.
FINANCE ACT, 1987
29.2 This
amendment comes into force with effect from 1st April, 1988, and will,
accordingly, apply to the assessment year 1988-89 and subsequent years.
[Section 32 of the Finance Act]
FINANCE ACT, 1987
Tax incentive for investment
in certain new shares
30.1 Under
the existing provisions of section 80CC of the Income-tax Act, deduction is
allowable within limits, in respect of acquisition of certain shares offered for
subscription to the public before 1st April, 1987.
FINANCE ACT, 1987
30.2 With
a view to provide tax incentive for investment in such shares, the concession
has been extended by 3 years. Deduction will be allowable subject to the
satisfaction of certain conditions in respect of investment in shares offered
for subscription before 1st April, 1990. The condition in respect of holding
period as mentioned in section 80CC(5) has been reduced from 5 years to 3 years.
FINANCE ACT, 1987
30.3 This
amendment will take effect from 1st April, 1987.
[Section 33 of the Finance Act]
FINANCE ACT, 1987
New provisions relating to
the national savings scheme to augment savings
31.1 The
Finance Act, 1987 has inserted a new section 80CCA. Under the new provisions,
deduction will be allowed to an individual, a Hindu undivided family and certain
categories of associations of persons or bodies of individuals in respect of the
deposits made in the National Savings Scheme. The deduction will be restricted
to 50 per cent of the amount deposited, as does not exceed Rs. 20,000 in a
previous year. In case the depositor makes any withdrawals from the amount
standing to his credit in the National Savings Scheme together with the interest
accrued thereon, an amount equal to 50 per cent of the amount so withdrawn shall
be deemed to be the income of the taxpayer for the previous year in which such
withdrawal is made. Interest on the deposits made under the National Savings
Scheme will be taxable only in the year of withdrawal and to the extent of 50
per cent thereof. The deposits in the account will qualify for exemption under
the Wealth-tax Act, along with other specific assets, subject to the overall
limit of Rs. 5 lakhs.
FINANCE ACT, 1987
31.2 This
amendment will come into force with effect from 1st April, 1988, and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Sections 34 and 76 of the Finance Act]
FINANCE ACT, 1987
Modification of the
provisions relating to deduction in
respect of donations to certain funds, etc.
32.1 Under
section 80G of the Income-tax Act, the taxpayer is entitled to a deduction, in
computing his taxable income, of a sum equal to 50 per cent of the donation made
to certain funds, institutions, etc. The amount of deduction which qualifies for
deduction is limited to 10 per cent of the gross total income of the donor,
subject to a monetary limit of Rs. 5 lakhs. With the amendment of section 80G by
the Finance Act, 1987, donations to any Regimental Fund (Funds set up by the
Army) or Non-Public Fund (Funds set up by the Navy and Air Force), established
by the Armed Forces of the Union, for the welfare of the past and present
members of such forces or their dependants, shall also qualify for deduction
subject to the limits and conditions laid down in section 80G.
FINANCE ACT, 1987
32.2 This
amendment will come into force with effect from 1st April, 1988, and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Section 35 of the Finance Act]
FINANCE ACT, 1987
Modification of the
provisions relating to deduction in respect of royalties, etc., from certain
foreign enterprises
33.1 Under
the existing provisions of section 80-O of the Income-tax Act, an Indian company
is entitled to a deduction of an amount equal to 50 per cent of the income, by
way of royalty, commission, fees and similar payments, received from the
Government of a foreign State or a foreign enterprise for consideration for the
use outside India of any patent, invention, model, etc. Such income has either
to be received in India in convertible foreign exchange or having been received
in foreign exchange outside India is brought into India. Explanation (ii)
to section 80-O, however, provides that if out of any such income, any sum is
utilised by the Indian company outside India in the manner permitted by the
Reserve Bank of India, the same would be deemed to have been brought into the
country and a deduction shall be allowed in respect of such amount.
The basic purpose of this incentive provision
is to earn foreign exchange for the country. This can be done effectively only
by ensuring inward remittance of foreign exchange within a reasonable period.
Therefore, Explanation (ii)
to section 80-O as it stood earlier has been deleted and a third proviso has
been inserted in section 80-O, laying down that a deduction will be allowed
under that section only in respect of income which is received in India in
convertible foreign exchange or has been brought into India within a period of
six months. However, where the Commissioner is satisfied (for reasons to be
recorded in writing) that the assessee is unable to do so within the time
specified above, because of reasons beyond his control, he may allow such
further time as may be considered necessary.
FINANCE ACT, 1987
33.2 It
was held by the Bombay High Court that a branch abroad of a company resident in
India would be a �foreign enterprise�, within the meaning of section 80-O. As
this was not the intention of the law, a new clause (ii) has been
inserted in Explanation to
section 80-O to clarify that a �foreign enterprise� means a person who is a
non-resident.
FINANCE ACT, 1987
33.3 Where
the deduction under section 80-O is not allowed on the ground that the
qualifying amount of income has not been brought into India in the relevant year
but has been received or brought into India in a subsequent year, the assessment
order in respect of the deduction under section 80-O was rectified under section
154 within a period of 4 years from the date on which such income was either
received in India or brought into India. The power to make such an amendment is
derived from section 155(12). Consequent to the introduction of the proviso
referred to in para 33.2 above, the provisions of section 155(12) were no longer
necessary and have, therefore, been deleted.
FINANCE ACT, 1987
33.4 The
deletion of the words �or having . . . . dealing in foreign exchange� has been
done only to simplify the section. It does not, in any manner, reduce or narrow
down the scope of application of the section itself. In other words, as long as
the payment made by the foreign State or foreign enterprise in convertible
foreign exchange is received within the specified period in India by or on
behalf of the assessee in accordance with the law in this regard (Foreign
Exchange Regulation Act, 1973), the assessee would be entitled to the deduction
under this section, if the other requirements in this regard are satisfied.
FINANCE ACT, 1987
33.5 These
amendments will come into force with effect from 1st April, 1988, and will,
accordingly, apply to the assessment year 1988-89 and subsequent years.
[Sections 36 and 44 of the Finance Act]
FINANCE ACT, 1987
Modification of provisions in
respect of remuneration received for services rendered outside India
34.1 Presently
section 80RRA of the Income-tax Act
provides for deduction of an amount equal to 50 per cent of any remuneration
received by an individual who is a citizen of India, if such remuneration is
received by him in foreign exchange from an employer for any service rendered by
him outside India.
FINANCE ACT, 1987
34.2 To
provide an incentive for bringing foreign exchange into India, the Amending Act
has enlarged the benefit of deduction to�
(i) 50
per cent of the remuneration received by the taxpayer ; or
(ii) 75
per cent of such remuneration as is brought into India by or on behalf of the
taxpayer in accordance with the Foreign Exchange Regulation Act, 1973 ;
whichever is higher.
FINANCE ACT, 1987
34.3 This
amendment will come into force with effect from 1st April, 1988, and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Section 37 of the Finance Act]
FINANCE ACT, 1987
Enhancing deduction in the
case of totally blind or physically handicapped persons
35.1 Section
80U of the Income-tax Act provides for deduction of an amount of rupees ten
thousand in computing the income of a resident individual who is totally blind
or suffers from any of the specified permanent physical disabilities. With a
view to providing relief to these categories of persons the Amending Act has
enhanced the amount of deduction from ten thousand rupees to fifteen thousand
rupees.
FINANCE ACT, 1987
35.2 The
amendment will take effect from 1st April, 1988, and will, accordingly, apply in
relation to the assessment year 1988-89 and subsequent years.
[Section 39 of the Finance Act]
FINANCE ACT, 1987
New provisions to levy
minimum tax on �book profit� of certain companies
36.1 It
is an accepted canon of taxation to levy tax on the basis of ability to pay.
However, as a result of various tax concessions and incentives certain companies
making huge profits and also declaring substantial dividends, have been managing
their affairs in such a way as to avoid payment of income-tax.
FINANCE ACT, 1987
36.2 Accordingly,
as a measure of equity, section 115J has been introduced by the Finance Act. By
virtue of the new provisions, in the case of a company whose total income as
computed under the provisions of the Income-tax Act is less than 30 per cent of
the book profit computed under the section, the total income chargeable to tax
will be 30 per cent of the book profit as computed. For the purposes of section
115J, book profits will be the net profit as shown in the profit and loss
account prepared in accordance with the provisions of Schedule VI to the
Companies Act, 1956, after certain adjustments. The net profit as above will be
increased by income-tax paid or payable or the provision thereof, amount carried
to any reserve, provision made for liabilities other than ascertained
liabilities, provision for losses of subsidiary companies, etc., if the amounts
are debited to the profit and loss account. Liabilities relating to expenditure
which has been incurred or which has accrued in respect of expenses which are
otherwise deducti-ble in computing income will not be added back. The amount so
arrived at is to be reduced by�
(i) amounts
withdrawn from reserves if any, such amount is credited to the profit and loss
account ;
(ii) the
amount of income to which any of the provisions of Chapter III applies, if any
such amount is credited to the profit and loss account ; and
(iii) the
amount of any brought forward losses or unabsorbed depreciation whichever is
less as computed under the provisions of section 205(1)(b) of the
Companies Act, 1956, for the purposes of declaration of dividends. Section 205
of the Companies Act requires every company desirous of declaring dividend to
provide for depreciation for the relevant accounting year. Further, the company
is required under section 205 to set off against the profit of the relevant
accounting year, the depreciation debited to the profit and loss account of any
earlier year(s) or loss whichever is less.
FINANCE ACT, 1987
36.3 Section
115J, therefore, involves two processes. Firstly, an assessing authority has to
determine the income of the company under the provisions of the Income-tax Act.
Secondly, the book profit is to be worked out in accordance with the Explanation to
section 115J(1) and it is to be seen whether the income determined under the
first process is less than 30 per cent of the book profit. Section 115J would be
invoked if the income determined under the first process is less than 30 per
cent of the book profit. The Explanation to
sub-section (1) of section 115J gives the definition of the �book profit� by
incorporating the requirement of section 205 of the Companies Act in the
computation of the book profit. Brought forward losses or unabsorbed
depreciation whichever is less would be reduced in arriving at the book profits.
Sub-section (2), however, provides that the application of this provision would
not affect the carry forward of unabsorbed depreciation, unabsorbed investment
allowance, business losses to the extent not set off, and deduction under
section 80J, to the extent not set off as computed under the Income-tax Act.
FINANCE ACT, 1987
36.4 In
the case of a tea company where income is derived from the sale of tea grown and
manufactured by the seller, only 40 per cent of such income is liable to tax
under rule 8 of the Income-tax Rules, 1962. 60 per cent of the income, which is
disregarded for the purposes of taxation is considered to be agricultural income
and is, therefore, exempt under the provisions of Chapter III. The net profit
determined in accordance with Schedule VI to the Companies Act, 1956, has to be
adjusted,inter alia, in
accordance with clause (f) and sub-clause (ii) of the Explanation to
section 115J(1). In the case of the tea companies, the book profit should be
computed by making all the adjustments referred to in the Explanation. However,
no adjustment in respect of clause (f) and sub-clause (ii) of theExplanation is
to be made for the agricultural income earned by tea companies from tea
business. 40 per cent of the adjusted amount arrived at in this manner will be
the book profit of the tea company in accordance with rule 8 of the Income-tax
Rules.
FINANCE ACT, 1987
36.5 The
following examples illustrate how the amended provisions relating to the new
section will be applied :
NEW COMPANIES
|
Book profits for the purposes of the Companies
Act, 1956 |
|
|
Profit under the Income-tax Act |
|
|
Year 1984 |
|
|
|
|
Rs. |
|
Rs. |
|
Loss excluding |
|
Loss excluding |
|
|
depreciation |
3,00,000 |
depreciation |
80,000 |
|
Depreciation |
1,00,000 |
Depreciation |
4,00,000 |
|
|
Year 1985 |
|
|
|
Profit before |
|
Profit before |
|
|
depreciation |
5,00,000 |
depreciation |
5,00,000 |
|
Less :
Depreciation as |
|
|
|
|
per books |
2,00,000 |
Less :
Depreciation |
4,00,000 |
|
|
3,00,000 |
|
1,00,000 |
|
Less :
Deduction |
|
Less :
Business loss for |
|
|
under section205(2) for the year 1984 |
1,00,000
2,00,000 |
1984 |
80,000
20,000 |
|
C.F. Business loss 1984 |
3,00,000 |
Less :
Unabsorbed |
|
|
|
|
depreciation |
20,000 |
|
|
|
|
Nil |
|
|
|
C.F. unabsorbed |
|
|
|
|
depreciation 1985 |
3,80,000 |
|
|
Year 1986 |
|
|
|
Net loss as per |
|
Business loss |
(�) 10,00,000 |
|
books before |
(�) 10,00,000 |
Add :
Depreciation as |
|
|
depreciation |
|
per Income-tax |
|
|
Depreciation |
2,00,000 |
Rules |
(�) 4,00,000 |
|
Business loss to be |
|
|
|
|
carried forward |
(�) 10,00,000 |
|
|
|
Unabsorbed |
|
|
|
|
depreciation to be |
|
|
|
|
carried forward |
(�) 2,00,000 |
|
|
|
|
Year 1987 |
|
|
|
Net profit |
10,00,000 |
Profit before |
|
|
|
|
depreciation |
10,00,000 |
|
Book depreciation |
2,00,000 |
Less :
Depreciation as |
|
|
|
|
per Income-tax Rules |
8,00,000 |
|
|
|
|
2,00,000 |
|
|
|
Less :
Carried forward |
|
|
|
|
business loss for 1986 |
|
|
|
|
to the extent adjusted |
2,00,000 |
|
|
|
Assessed income |
Nil |
Application of section 115J
|
|
|
|
Rs. |
|
Profit before depreciation |
10,00,000 |
|
Less :
Book depreciation |
2,00,000 |
|
|
8,00,000 |
|
Less :
Deduction under section 205(2) |
2,00,000 |
|
|
6,00,000 |
|
Out of the amount whichever is less: |
|
|
- 1984 : Business loss |
3,00,000 |
|
- 1986 : Business loss |
10,00,000 |
|
Total loss |
13,00,000 |
|
1986 : Depreciation |
2,00,000 |
|
Assessable income 30% of Rs. 6 lakhs, i.e., Rs.
1.8 lakhs |
|
|
Amount to be carried forward as per sub-section
(2) of |
|
|
section 115J |
|
|
-1984 : Unabsorbed depreciation |
3,80,000 |
|
-1986 : Business loss |
8,00,000 |
|
Unabsorbed depreciation |
4,00,000 |
FINANCE ACT, 1987
36.6 These
amendments will come into force with effect from 1st April, 1988, and will,
accordingly, apply in relation to the assessment year 1988-89 and subsequent
years.
[Section 43 of the Finance Act]
JUDICIAL ANALYSIS
EXPLAINED IN - In V.V.
Trans - Investments (P.) Ltd. v. ITO
[1992] 42 ITD 242 (Hyd. - Trib.) it was observed that it
is a well-established principle of interpretation of that courts, in construing
a statute, should give much weight to the interpretation put upon it, at the
time of its enactment and, by those whose duty it has been to construe, execute
and apply it. The Circular No. 495 has explained the true scope and nature of
the provisions of section 115J and the scope and nature was explained by the
said circular at the time of enactment of the section. We, therefore, find it
more reliable and hence acceptable.
See also Surana
Steels (P.) Ltd. v. Dy. CIT
[1993] 45 ITD 1 (Hyd. - Trib.) (SB)
EXPLAINED IN - The
example given above was examined in Indo
Marine Agencies (Kerala) (P.) Ltd. v. A
CIT [1995] 124 ITR (Trib.)(Coch.)
148, and the Tribunal observed:
�In the above example, let it be assumed that the
decision is to declare dividends out of the profits of the financial year
1987-88. Let it be also assumed that the company had suffered losses after
charging depreciation in its accounts from the commencement of the Companies
(Amendment) Act, 1960, except in relation to the financial years 1983-84,
1985-86 and 1986-87. In such an event, if the company desires to declare
dividends in respect ofthe financial year 1987-88, it has, under the first
option, to set off the loss or depreciation, whichever is less, from the
com�mencement of the Companies (Amendment) Act, against the profits of the
financial year 1987-88. Under the second option, it can also set off the loss or
depreciation whichever is less in re�spect of the years after the commencement
of the Companies (Amendment) Act in which the loss was incurred against the
prof�its of the previous financial years, viz., 1983-84,
1985-86 and 1986-87. The illustration given in the Board�s Circular cited supra, follows
the second option, on which the Assessing
Offi�cer�s working is based. The assessee relies on the computation in
accordance with the first option. In our considered opinion, the option that is
favourable to the assessee can be adopted for the reason that it lies within the
competence of the company to follow one of the options which is in its favour.
In this view of the matter, we hold that the assessee is entitled to set off the
amount of loss or the amount of depreciation whichever is less in respect of
past years against the profits of the year ending on 30th Sept., 1987, relevant
to the assessment year
1988-89. In this context it must be borne in mind that the expression �financial
year� as defined in section 2(5) of the Companies Act, 1956, is the same thing
as �previous year� as defined in the IT Act, 1961. Further, in view of the
provisions of the Companies Act, as admubrated in section 205, the assessee is
entitled to give effect to the provisions of clause (iii) of Explanation to
sec�tion 115J as against current years profit by taking into account the lower
of the amount of loss or the amount of depreciation in respect of the years in
which the company suffered losses after the commencement of the Companies
(Amendment) Act, 1960. Further, in invoking section 115J of the IT Act, we are
concerned with the profits of the year ending on 30th Sept., 1987 and the
applicabil�ity thereto of the provisions of clause (b) of the first
proviso to sub-section (1) of section 205 of the Companies Act, but not with any
other previous financial year or years. Hence, the second option on which the
Circular is based cannot be preferred and the Assessing Officer is directed to
base his calculations under the first option. ...� (p. 161)
FINANCE ACT, 1987
Modification of the scope of
deduction of tax at source from salaries
37.1 Under
the existing provisions of section 192 of the Income-tax Act, tax has to be
deducted at source by any person responsible for paying any income chargeable
under the head �Salaries�.
FINANCE ACT, 1987
37.2 There
are cases where an employee renders service with more than one employer and the
details of salaries drawn from earlier employer are required for working out the
rate at which the tax is to be deducted at source in respect of the salary paid
by the present employer. There are also cases where an employee does not
disclose such other salary to the employer. In such cases, the employer normally
cannot be held liable for not making adequate deductions. With a view to
simplify the provisions of deduction of
tax at source in such cases and also to check avoidance of tax on salary
received by an employee from more than one employer, section 192 has been
amended.
FINANCE ACT, 1987
37.3 The
new sub-section (2) inserted in section 192 provides for deduction of tax at
source by such employer (as the taxpayer may choose) from the aggregate salary
of the employee who is or has been in receipt of salary from more than one
employer. The employee is now required to furnish to the present employer
details of the income under the head �Salaries� due or received from the
former/other employer and also tax deducted at
source therefrom, in writing and duly verified by him and by
the former/other employer. The
present employer will be required to deduct tax at source on the aggregate
amount of salary (including salary received from former or other employer).
FINANCE ACT, 1987
37.4 Under
the existing provisions of section 89(1), it is the Income-tax Officer who is
empowered to give relief from the incidence of tax at a higher rate in a case
where an employee receives salary in arrears or in advance. The Amending Act by
inserting sub-section (2A) in section 192 provides that in respect of salary
payment of employees of Government or public sector undertakings, deduction of
tax at source may be made after allowing relief under section 89(1).
FINANCE ACT, 1987
37.5 Presently
the person making payment of salary cannot take into account other incomes of
the employee for the purpose of deduction of tax at source. The Amending Act by
inserting sub-section (2B) enables a taxpayer to furnish particulars of income
other than salaries to his employer who shall deduct out of the salary payment,
the tax due on the total income subject to the condition that the total amount
of tax deducted shall not be less than the amount deductible from income from
salaries only.
FINANCE ACT, 1987
37.6 These
amendments will come into force with effect from 1st June, 1987.
[Section 45 of the Finance Act]
FINANCE ACT, 1987
Modification of the
provisions relating to tax deduction at source
38.1 With
a view to rationalise the provisions of sections 194, 194A and 194D, the limits
up to which no tax is to be deducted have been raised as under :
|
Sl. No. |
Type of payment |
Present limit up to which no tax is deductible |
Amended limit |
|
|
|
Rs. |
Rs. |
|
1. |
Dividend [section 194] |
1,000 |
2,500 |
|
2. |
Interest other than interest on securities
[section 194A] |
1,000 |
2,500 |
|
3. |
Insurance commission[section 194D] |
Nil |
5,000 |
FINANCE ACT, 1987
38.2 Under
the existing provisions, deduction of tax at source from interest is to be made
at the time of payment or credit to the account of the payee. With a view to
prevent postponement of liability relating to such deduction of tax at source,
section 194A has been amended to provide that tax will be deducted at source, on
accrual of interest at the end of the accounting year or at the time of credit
to the account of a payee or at the time of payment, whichever is earlier.
Similarly, section 195 has been amended to ensure that deduction of tax at
source from payments to non-residents will have to be made at the time of
payment or at the time of giving credit to the account of the non-resident,
whichever is earlier. Any sum credited to �suspense account� or �interest
payable account� shall be deemed to be credited for the purpose of tax deduction
at source.
FINANCE ACT, 1987
38.3 Enabling
powers have been conferred on the Central Board of Direct Taxes under section
197 to make rules for prescribing procedure in relation to the issue of
certificates by the Assessing Officer, for authorising non-deduction of tax at
source or for deduction at a lower rate.
FINANCE ACT, 1987
38.4 The
provisions relating to furnishing of annual return in respect of tax deduction
at source incorporated presently in sections 285 and 286 have been by the
Amending Act inserted in section 206. Consequently sections 285 and 286 have
been omitted.
FINANCE ACT, 1987
38.5 The
Amending Act has introduced a new section 195A which lays down the method of
calculation of tax deductible at source in cases where payments are made
tax-free. Under clause (6A) of section 10, the tax borne by an Indian
resident on royalty, etc., paid to foreign companies is not treated as part of
the income of the foreign recipients. Section 195A provides for grossing up of
the tax only if it forms part of the income. Since tax exempted under section
10(6A) does not form part of the total income, there would be no grossing
up of such tax for the purposes of tax deduction at source. Similarly, the tax
borne by the employer, to the extent it is exempt under section 10(6)(viia),
shall not be grossed up for purposes of tax deduction at source.
FINANCE ACT, 1987
38.6 These
amendments will come into force from 1st June, 1987.
[Sections 46, 47, 48, 49, 50, 51, 56 and 71
of the Finance Act]
FINANCE ACT, 1987
Amendment of provisions
relating to issue of certificate for tax deduction
39.1 Under
the provisions of section 203 of the Income-tax Act any person responsible for
deduction of tax at source is required, at the time of credit or payment of the
amount, etc., to issue a certificate that tax has been deducted and to specify
the amount deducted. The amount deducted at source has to be deposited within a
certain period of time from the date on which the said amount was deducted. As
the certificate for tax deduction has to be issued at the time of credit or
payment of the amount, in most of the cases it cannot be ascertained that the
amount deducted at source has been credited to the Government account. Section
203 has been amended so as to provide that the certificate for deduction of tax
shall be issued, within such time, as may be prescribed.
FINANCE ACT, 1987
39.2 This
amendment will come into force from 1st June. 1987.
[Section 54 of the Finance Act]
FINANCE ACT, 1987
New provisions relating to
allotment of tax deduction account number
40.1 For
better monitoring of deduction of tax at source and its deposit in the
Government account, the Amending Act has inserted a new section 203A in the
Income-tax Act. Every person deducting tax at source in respect of any payment
made and who has not been allotted a tax deduction account number will make an
application for allotment of such a number to the income-tax authority. This
number will be quoted in all the challans for payment of any tax deducted at
source, in all certificates for tax deducted, in all the prescribed returns
filed by persons paying salary and interest to residents and in all other
documents pertaining to such transactions which the Central Board of Direct
Taxes may prescribe.
FINANCE ACT, 1987
40.2 A
person who fails to comply with the provisions of section 203A
will be liable to penalty under the newly inserted section 272BB. The penalty
may extend up to a sum of Rs. 5,000. A reference to section 272BB has been made
by the Amending Act in section 273B which provides that no penalty would be
levied if a reasonable cause for failure is put forth by the person defaulting
in terms of section 203A.
FINANCE ACT, 1987
40.3 These
amendments will come into force from 1st June, 1987.
[Sections 55, 68 and 69 of the Finance Act]
FINANCE ACT, 1987
Modification of the
provisions relating to settlement of cases
41.1 Chapter
XIXA of the Income-tax Act deals with the entire scheme for settlement of cases.
With a view to ensure the functioning of a Bench in certain situations which
have so far presented it from discharging its powers, the Amending Act has
introduced new sections 245BA, 245BB and 245BC. In case the Chairman, Vice
Chairman or any of the Members of a Bench is unable to discharge his functions,
for whatever reasons, the remaining two persons will now be competent to
constitute a Bench and pass orders on matters covered by applications for
settlement. In such a situation, the Senior Member will preside over the Bench.
Where a presiding officer, looking to the nature of a case, considers that it
should be heard by a Bench consisting of 3 members, he may make a reference in
this regard to the Chairman for transfer to such Bench as the Chairman deems
fit. Where there is a difference of opinion between the Members of a Bench, the
majority decision will prevail. Where the Members are equally divided, they will
refer the points of difference to the Chairman who will either hear the point(s)
himself, or refer the point(s), for hearing by one or more of the other Members
of the Settlement Commission. The Amending Act has conferred powers on the
Central Government to authorise a Vice Chairman to act as Chairman in certain
situations.
FINANCE ACT, 1987
41.2 The
experience of the Department has been, that when evasion of tax is detected in a
case, the assessee deliberately omits to file tax returns and makes an
application to the Settlement Commission, so as to escape penalty for
concealment. Proviso to section 245C(1) has, therefore, been amended so that no
application can be made to the Settlement Commission unless the assessee
furnishes the return required to be filed under the Act.
FINANCE ACT, 1987
41.3 The
Amending Act has rationalised the mode of computation of additional amount of
income-tax payable, in relation to the income disclosed in the application for
settlement. Under the existing provisions of sub-clause (iii) of clause (1B)
of section 245C, where an assessment has been completed, the additional amount
of tax payable is calculated by aggregating the tax assessed and tax on
disclosed income. The Amending Act provides that, in such a situation, the
additional amount of tax payable will be worked out on the returned income plus the
income disclosed before the Settlement
Commission. This gets over a situation, where for example, the returned income
is Rs. 1 lakh, the assessed income is Rs. 10 lakhs and disclosed income is Rs. 5
lakhs. In a case like this, as per the existing provisions, the assessee would
have to pay tax on total income of Rs. 15 lakhs (Rs. 10 lakhs as assessed plus Rs.
5 lakhs as disclosed before the Settlement Commission.) The Amending Act
provides that the assessee will have to pay tax on Rs. 6 lakhs only.
FINANCE ACT, 1987
41.4 Presently,
the Settlement Commission has absolute powers of granting immunity to any person
from being prosecuted. The Amending Act by inserting proviso to section 245H(1),
precludes the Commission from granting immunity in cases where prosecution has
been launched, prior to the date of receipt of application for settlement. By
inserting a new sub-section (1A) in section 245H, it has also been provided that
any immunity granted by the Commission to any person, shall stand withdrawn on
failure of such person to pay taxes, etc., within the time allowed as per the
order of settlement or on failure of such a person to comply with any other
condition subject to which the immunity is granted.
FINANCE ACT, 1987
41.5 As
a measure of further rationalisation, the Amending Act empowers the Settlement
Commission to reopen past assessments up to a period of 10 years as against 8
years under the existing provisions. The Commission has also been invested with
the powers to send a case back to the Income-tax Officer if the assessee does
not co-operate. In such cases, the Income-tax Officer will dispose of the case
in accordance with the provisions of the Act, as if no application under section
245C had been made.
FINANCE ACT, 1987
41.6 Corresponding
amendments in Chapter V-A (Sections 22A to 22M) of the Wealth-tax Act, dealing
with settlement of cases in respect of wealth-tax have also been effected.
FINANCE ACT, 1987
41.7 These
amendments will come into force with effect from 1st June, 1987.
[Sections 57 to 67 and 77 to 87 of the
Finance Act]
FINANCE ACT, 1987
Bar of suits in civil Court
to set aside or modify any order passed
42.1 Under
the existing provisions of section 293, no suit can be brought in any civil
court to set aside or modify any assessment order made under the Income-tax Act
and no prosecution, suit or other proceedings shall lie against the Government
or any officer of the Government for anything done in good faith or intended to
be done under the Act.
Similar provisions are contained in section
43 of the Wealth-tax Act, 1957, and section 42 of the Gift-tax Act, 1958. These
provisions have been interpreted to mean that the bar of suits in civil courts
is confined to assessment orders only and not to other orders under the
Income-tax, Wealth tax and Gift-tax Acts.
FINANCE ACT, 1987
42.2 Direct
tax laws contain very detailed provisions relating to appeals against orders
passed by various authorities. They are self-contained codes. It is, therefore,
not appropriate for civil courts to assume jurisdiction in respect of orders
made under the Act. Section 293 of the Income-tax Act and the corresponding
provisions of the Wealth-tax Act and the Gift-tax Act have been amended to
provide that no suit shall be brought in any civil court to set aside or modify
any order made under the said Acts.
FINANCE ACT, 1987
42.3 These
amendments will come into force with effect from 1st March, 1987.
[Sections 72, 89 and 91 of the Finance Act]
FINANCE ACT, 1987
Amendment of the Eleventh
Schedule to the Income-tax Act
43.1 The
Eleventh Schedule to the Income-tax Act lists non-priority products. The
manufacturers of these products are denied tax concessions under section 32AB
and other sections of the Act. Item No. 5 of the Eleventh Schedule relates to
�aerated waters� in the manufacture of which �blended flavouring concentrates in
any form are used�. It has been found that certain persons manufacturing aerated
waters are using synthetic essence and are claiming the benefit on the ground
that synthetic essence cannot be included in the expression �blended flavouring
concentrates in any form�. As this was not the intention of the Legislature the
Amending Act has inserted an Explanation to
item 5 of the Eleventh Schedule which clarifies that blended flavouring
concentrates would include the synthetic essences in any form.
FINANCE ACT, 1987
43.2 Item
No. 22 of the Eleventh Schedule has been amended to exclude computers from the
list of non-priority items. Office machines and apparatus used for transmission
and reception of messages have also been excluded from the non-priority list of
articles or things as contained in this item of the Eleventh Schedule.
FINANCE ACT, 1987
43.3 This
amendment will come into force from 1st April, 1988, and will, accordingly,
apply in relation to the assessment year 1988-89 and subsequent years.
[Section 73 of the Finance Act]
Amendments to Wealth-tax Act
Finance Act, 1987
Modifications in the provisions relating to waiver of interest under the Wealth-tax Act
44.1 At present the Board is empowered to reduce or waive the amount of interest payable for non-payment or late payment of wealth-tax under section 31(2A) of the Wealth-tax Act. This power is exercised on the basis of recommendations made by the Commissioner subject to satisfaction of certain conditions. The power to waive the amount of interest is only in respect of the amount which is outstanding. A defaulter is, therefore, placed in a better position than a person who has managed to pay interest in spite of considerable hardship.
Finance Act, 1987
44.2 To mitigate the hardship caused in such cases, the Amending Act provides that the interest can be reduced or waived even in those cases where it has been paid, subject to the satisfaction of other conditions. Further, the power of the Board to reduce or waive interest has been delegated to the Commissioners.
Finance Act, 1987
44.3 This amendment will come into force with effect from 1st April, 1987.
[Section 88 of the Finance Act]