CIRCULAR NO. 516, DATED 15-6-1988

Explanatory Notes

Direct Tax Laws (Amendment) Act, 1987-I

Provisions relating to assessment of partnership firms - Clarification regarding

1. A new scheme relating to assessment of partnership firms has been introduced by the Direct Tax Laws (Amendment) Act, 1987 [hereinafter referred to as the DTL(A) Act, 1987] to be effective from 1-4-1989, i.e., from the assessment year 1989-90.

Direct Tax Laws (Amendment) Act, 1987-I

2. After the DTL(A) Act, 1987 was enacted, a number of representations from various quarters were received regarding the new scheme of taxation. On 30-3-1988, the Minister of State in the Ministry of Finance made a statement in the Parliament to the effect that suitable amendments will be moved by the Government to provide that the new scheme relating to assessment of partnership firms will come into effect from 1-4-1990 instead of 1-4-1989, i.e., from the assessment year 1990-91. Before that date, the provisions that existed, before these were amended by the DTL(A) Act, 1987, will continue to operate. Because of the change relating to date of commencement of the new provisions relating to assessment of partnerships, doubts have been raised regarding some other aspects concerning the assessment of firms. Hence, the following clarifications are being issued to set at rest any controversy in this regard.

Direct Tax Laws (Amendment) Act, 1987-I

3. For the assessment years 1988-89 and 1989-90 the old provisions in the Income-tax Act regarding assessment of firms, before these were amended by the DTL(A) Act, 1987, will continue to apply. The important sections containing the old provisions for taxation of firms and their partners, which will continue to operate for the assessment years 1988-89 and 1989-90 are listed below :

           (i)       Section 40(b) relating to disallowance of interest and salary, etc., paid by a firm to its partners.

           (ii)      Section 64(1) relating to inclusion of shares of spouse and minor children in the income of the other spouse or parent.

           (iii)     Section 67 relating to computation of a partner�s share in the income of the firm.

           (iv)      Sections 75 to 77 relating to carry forward of losses of registered and unregistered firms.

           (v)       Section 86(iii) relating to rebate on the share income of a partner of an unregistered firm included in his total income.

           (vi)      Section 182 relating to assessment of a registered firm and its partners.

           (vii)     Section 183 relating to assessment of an unregistered firm.

           (viii)    Sections 184 to 186 relating to application for registration, procedure for registration and cancellation of registration of a firm under the Income-tax Act.

           (ix)      Section 187 relating to change in constitution of a firm.

Direct Tax Laws (Amendment) Act, 1987-I

4. Although the new provisions relating to assessment of partnership firms are to come into force with effect from 1-4-1990, there are other amendments made by the Direct Tax Laws (Amendment) Act, 1987 which are operative with effect from 1-4-1989 in case of all the assessees including partnership firms. The important ones are discussed below :

           (i)       Introduction of financial year as the uniform previous year :

                      A new section 3 substituted in the Income-tax Act for the old section 3 by the DTL(A) Act, 1987 provides for the financial year (year ending on 31st March) as the uniform previous year for all the assessees. The provisions of the new section 3 and those of the Tenth Schedule, which provide relief during the transitional previous year for the assessment year 1989-90, will be applicable in the case of the partnership firms also, like other assessees. This means that a partnership firm, which has been having a previous year different from that ending on 31st March, will have to extend its previous year for the assessmnt year 1989-90 up to 31-3-1989. Thus, for example, in the case of a partnership firm, which closes its accounts on 30th June every year, the previous year for the assessment year 1989-90 will consist of 21 months (1-7-1987 to 31-3-1989).

           (ii)      The new provisions relating to filing of return of income, assessment procedure and charging of mandatory interest under sections 234A to 234C will also be applicable in the case of partnership firms with effect from 1-4-1989, like other assessees.

Direct Tax Laws (Amendment) Act, 1987-I

5. Deduction of tax at source: The provisions of the new section 194E relating to deduction of tax at source from interest and salary, etc., paid by a firm to the partners and also consequent amendment of section 194A will not be effective from 1-4-1988, as provided in the DTL(A) Act, 1987. These will now be made effective, if not changed from 1-4-1989.

Direct Tax Laws (Amendment) Act, 1987-I

6. The new advance tax provisions are effective from 1-4-1988 and are applicable to all assessees, including the partnership firms and their partners. Thus advance tax during the current financial year (for the assessment year 1989-90) is to be paid as follows :

II

Amendments at a glance*

AMENDMENTS TO THE INCOME-TAX ACT, 1961

CHANGE IN DESIGNATION OF INCOME-TAX  AUTHORITIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new authorities (section 2 of the Amending Act, 1987)

6.1 The Amending Act, 1987, has changed the designation  of certain existing income-tax authorities. Section 2 of the Amending Act, 1987, provides that, save as otherwise expressly provided in the Income-tax Act and unless the context otherwise requires, references to the old designation of the authorities in that Act shall be construed as references to the new designation.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

6.2 Section 2 of the Amending Act, 1987, also provides that a reference to the �Income-tax Officer� in the Income-tax Act shall be construed as a reference to an �Assessing Officer�. It further provides that a reference to the �Commissioner� in that Act shall be construed as a reference to the  �Chief Commissioner or Commissioner�. However, a proviso below the said section 2 provides that references to the �Commissioner� occurring in sections 245D (dealing with procedure on receipt of an application by the Settlement Commission), 253 (dealing with appeals to the Appellate Tribunal), 256 (dealing with statement of a case to the High Court), 263 (dealing with revision by the Commissioner of orders prejudicial to revenue) and 264 (dealing with revision by the Commissioner of other orders) of the Act shall not be construed as a reference to the �Chief Commissioner�. The effect is that matters mentioned in these sections shall be dealt with by the concerned Commissioners only and not by the Chief Commissioner.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 116 relating to income-tax authorities

6.3 The old provisions of section 116 of the Income-tax Act enumerated the authorities for the purposes of the Act. The Amending Act, 1987 has substituted this section by a new section, which redesignates some of the existing authorities and also includes some new authorities. Changes made in designations are as under :

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

6.4 Changes in the designations at Sl. Nos. (i) to (iii) is made with a view to making the designations more indicative of the nature of work of the officers. Change in designations at Sl. Nos. (iv) to (vi) is made in keeping with the recommendations made by the Wanchoo Committee (1971) and the Chokshi Committee (1978) and to fall in line with the pattern followed in other Central Services, as earlier designations were not compatible with the level of seniority of the officers and were also not comparable with the designations prevailing in the sister department of Central Excise and Customs. The Income-tax Officer Group �B� will continue to be called an Income-tax Officer.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

6.5 Certain new authorities, namely, the Director-General, the Chief Commissioner and the Tax Recovery Officer, which are presently functioning, are also included in the new section 116. The authority �Additional Commissioner of Income-tax�, being no longer in existence, is omitted from the section.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Consequential changes in the definition of the income-tax authorities (section 2)

6.6 Consequent to changes indicated in the preceding paras, some of the definitions of income-tax authorities in section 2 of the Income-tax Act have been amended, some have been deleted, while some new definitions have been inserted. Thus, a new clause (7A) inserted in section 2 of the Act defines �Assessing Officer� to mean an Income-tax Officer, an Assistant Commissioner or a Deputy Commissioner, as the case may be, who is exercising jurisdiction as an Assessing Officer under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

6.7 These amendments have come into force with effect from 1st April, 1988.

APPOINTMENT, CONTROL AND JURISDICTION OF 
INCOME-TAX AUTHORITIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Appointment and control of income-tax authorities (sections 117 and 118)

7.1 Under the old provisions of section 117 of the Income-tax Act, the appointing authorities and the various authorities to be appointed by them were specified in detail. As a result, every time a change was required to be made, it became necessary to amend the Act.

The Amending Act, 1987 has, therefore, substituted a new section for the existing one to eliminate the elaborate description of appointing authorities and the authorities that can be appointed by them. The new section empowers the Central Government to appoint such persons as it thinks fit to be the income-tax authorities. It further empowers the Central Government to authorise the Board, a Director-General, a Chief Commissioner, a Director or a Commissioner to appoint income-tax authorities below the rank of Assistant Commissioner (hitherto Income-tax Officer Group �A�). It also empowers an income-tax authority authorised in this behalf by the Board, to appoint such executives or ministerial staff as may be necessary to assist it in the execution of its functions.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.2 The old provisions of section 118 spelt out the control over the income-tax authorities. The section described in detail as to which income-tax authority was subordinate to whom. As a result, any change in the matter required an amendment of the section through a prolonged legislative process. The Amending Act, 1987 has, therefore, substituted the existing section by a new section, which empowers the Board to issue necessary notification directing that any income-tax authority or authorities specified in the notification shall be subordinate to such other income-tax authority or authorities as may be specified in the notification.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Instructions to subordinate authorities (section 119)

7.3 (i) Under the old provisions of clause (b) of sub-section (2) of section 119, the Board could authorise only a Commissioner or an Income-tax Officer to admit a belated application or a claim for any exemption, deduction, refund, etc. Now, there are other assessing authorities under the Act, like the Deputy Commissioner (Assessment). As per the old provisions, the Board could not have issued directions to them. The Amending Act, 1987, has removed this lacuna by amending clause (b) of sub-section (2) of the section so that the Board can now authorise any income-tax authority, other than a Deputy Commissioner (Appeals) or a Commissioner (Appeals), to admit such belated application or claim.

(ii) Under the old provisions of sub-section (3) of the section, the Income-tax Officer was bound to observe and follow the instructions issued to him by his superiors under whom he was posted. This provision is unnecessary, especially in view of the provisions of the new section 118. The Amending Act, 1987 has, therefore, omitted sub-section (3) of the section.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Jurisdiction of income-tax authorities (section 120)

7.4 Under the old provisions, jurisdiction of various income-tax authorities and functions of Inspectors of Income-tax were given in separate sections as under :

In essence, all these sections provided that the income-tax authorities shall perform their functions in the area or over the persons, etc., assigned to them either by the Board or by the Commissioner of Income-tax, depending upon the rank of the income-tax authority.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.5 The old provisions of sections 125, 125A, 126, 130 and 130A provided for jurisdiction under certain special circumstances. Section 125 empowered the Commissioner to assign a case from an Income-tax Officer to an Inspecting Assistant Commissioner. Section 125A empowered the Commissioner to confer concurrent jurisdiction over a case to an inspecting Assistant Commissioner and an Income-tax Officer. Section 126 empowered the Board to assign cases to a particular authority, notwithstanding the powers of other income-tax authorities. Section 130 clarified that where two or more Commissioners have jurisdiction over an assessee, each of them will perform only those functions as are assigned by the Board. Section 130A provided that when two or more Income-tax Officers exercise jurisdiction over an assessee, each of them shall perform such functions as are assigned to him by the Board or the Commissioner or the Inspecting Assistant Commissioner, as the case may be.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.6 It will be observed from the above that all these sections essentially contained provisions relating to the jurisdiction of various income-tax authorities and every possible circumstance had been provided for in these sections. Instead of mentioning the jurisdiction of each income-tax authority separately, power could have been given in a single comprehensive section enabling the Board to assign jurisdiction and also to authorise other income-tax authorities to do so. The Amending Act, 1987 has, therefore, omitted sections 120, 121, 121A, 122, 123, sub-sections (1) and (2) of sections 124, 125, 125A, 126, 128, 130 and 130A and combined the provisions of these sections in a new section 120.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.7 The new section 120 provides that income-tax authorities shall exercise all or any of the powers and perform all or any of the functions conferred or assigned to them by the Board. The Board is also empowered to delegate powers to the authority below it so as to enable such authority to issue orders for the exercise of the powers and performance of the functions by the authorities subordinate to it. While issuing directions, the Board or any other income-tax authority authorised by the Board may have regard to the criteria like the territorial area, persons or classes of persons, incomes or classes of incomes and cases or classes of cases.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.8 The new section further empowers the Board to issue general or special orders to,�

(a) authorise any Director-General or Director to perform such functions of any other income-tax authority as may be assigned to him by the Board;

(b) empower the Director-General or Chief Commissioner or Commissioner to issue orders in writing that the powers and functions conferred on or assigned to the Assessing Officer in respect of any specified area or persons or classes of persons or incomes or classes of incomes or cases or classes of cases shall be exercised or performed by a Deputy Commissioner.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.9 The new section also makes provisions for conferring concurrent jurisdiction on the Assessing Officer. It is provided that where Assessing Officers performing concurrent functions are of different classes, the authority lower in rank among them shall exercise powers and perform functions, as the higher authority amongst them may direct. The Board is further empowered to regulate matters concerning jurisdiction, for purposes of furnishing of the return of income or the doing of any other act or thing under the Act or any rule made thereunder by any persons or classes of persons by issuing notification in the Official Gazette.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Jurisdiction of Assessing Officers (section 124)

7.10 The old provisions of section 124 dealt with jurisdiction of Income-tax Officers. It was also provided that in case of dispute about jurisdiction of an Income-tax Officer, the question shall be decided by the Commissioner or where the dispute related to the areas within the jurisdiction of different Commissioners, by the Commissioners concerned or, if they did not agree, by the Board. In regard to the provisions for questioning the jurisdiction of an Income-tax Officer, it was provided that no person shall call in question the jurisdiction,�

(a) where a return of income has been filed, after the expiry of one month from the date of filing the return or after the completion of assessment, whichever is earlier ;

(b) where no such return has been filed, after the expiry of the time allowed by the notice under section 139(2) or 148 for making of the return.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.11 The Amending Act, 1987, has substituted a new section for the existing section 124. The provisions of sub-sections (1) and (2) of the existing section relating to jurisdiction of Income-tax Officers do not find a place in the new section 124. The same have been merged along with other sections, in the new section 120. The provisions of the earlier sub-sections (3) to (7), with appropriate amendments, are reproduced in sub-sections (1) to (5) of the new section 124. The amendments are :�

  (i) Instead of dealing with jurisdiction of an Income-tax Officer, the new section deals with the jurisdiction of an Assessing Officer, which includes an Income-tax Officer, an Assistant Commissioner and also a Deputy Commissioner, who has been directed to perform the functions of an Assessing Officer.

(ii) In case of dispute about the jurisdiction of an Assessing Officer, the question shall be decided by the Director-General or the Chief Commissioner or the Commissioner concerned, instead of only the Commissioner, as at present.

(iii) Where there is disagreement between two or more Directors-General or Chief Commissioners or Commissioners regarding jurisdiction of an Assessing Officer, the Board or such Director-General or Chief Commissioner or Commissioner, as may be authorised in this behalf by the Board through a notification, will be competent to decide the issue, instead of only the Board, as at present.

(iv) The provisions regarding calling in question the jurisdiction of an Income-tax Officer have also been changed in view of the proposed new procedure of assessment, where issue of a notice under section 139(2) is dispensed with and completion of assessment in all cases is also not necessary. It is now provided that no person shall be entitled to call in question the jurisdiction of an Assessing Officer :

(a) where a return of income under section 139(1) has been filed, after the expiry of one month from the date of service of notice under section 142(1) or 143(2) or after the completion of assessment, whichever is earlier,

(b) where no such return has been filed, after the expiry of the time allowed by the notice under section 142(1) or under section 148 for furnishing of the return, or the date of hearing specified in a notice issued before passing an order under section 144, whichever is earlier.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Power to transfer cases [section 127]

7.12 Under the old provisions of section127 of the Income-tax Act, the Commissioner or the Board could transfer cases from one or more income-tax authorities to other income-tax authorities. The Commissioner could transfer a case from one officer to another, within his charge. The Board had similar power to transfer cases from one officer to another irrespective of the fact that the two officers were working under different Commissioners. Even when the Commissioners agreed that the cases could be transferred among their officers, the orders had to be passed by the Board.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.13 The Amending Act, 1987, has substituted a new section for the existing section 127. The new section incorporates the provisions of the existing section with the following amendments:�

  (i) The power of transfer of cases is given to the Director-General, Chief Commissioner or Commissioner, instead of only the Commissioner, where the Assessing Officers are working under the same Director-General, Chief Commissioner or Commissioner.

(ii) Cases can be transferred between the Assessing Officers working under different Directors-General or Chief Commissioners or Commissioners,

(a) if the concerned Directors-General or Chief Commissioners or Commissioners agree, by the Director-General or Chief Commissioner or Commissioner from whose jurisdiction the case is to be transferred; and

(b) if the concerned Directors-General or Chief Commissioners or Commissioners do not agree, by the Board or any such Director-General, Chief Commissioner or Commissioner as the Board may, by notification in the Official Gazette, authorise in this behalf.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.14 The old provisions regarding giving the assessee a reasonable opportunity of being heard, where the cases are to be transferred among officers in different cities, are incorporated in the new section as well. Similarly, the new section incorporates the provisions of the old section that the transfer of a case shall not render necessary the reissue of any notice already issued by the Assessing Officer from whom the case is transferred.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

7.15 These amendments have come into force with effect from 1st April, 1988.

[Sections 30 to 35 of the Amending Act, 1987]

 TAX INCENTIVES TO MUTUAL FUNDS SET UP BY BANKS, ETC.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

8.1 In order to fulfil the assurance given by the Finance Minister in his Budget Speech for the year 1987-88, the Amending Act, 1987 has made various amendments to the Income-tax and Wealth-tax Acts to provide tax concessions to the Mutual Funds set up by the public sector banks or public financial institutions as well as to the investors (unit-holders) in these Funds.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

8.2 The tax concessions provided under the Income-tax Act are:�

  (i) A new clause (23D) has been inserted in section 10 of the Act relating to incomes not to be included in the total income. The said new clause provides exemption to the income of such Mutual Fund set up by a public sector bank or a public financial institution and subject to such conditions (including the condition that at least 90 per cent of the income from the Mutual Fund shall be distributed to the unit holders every year), as the Central Government may specify in this behalf by notification in the Official Gazette. An Explanation at the end of the said new clause defines the expressions �Public sector bank� and �public financial institution�.

(ii) A new clause (va) has been inserted in sub-section (1) of section 80L of the Act, relating to deductions in respect of interest on certain securities, dividends, etc. The said new clause extends the deduction available under this section (up to Rs. 7,000) to the income received by the unit-holders in respect of units of a Mutual Fund specified under section 10(23D).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

8.3 The tax concessions provided in respect of the Mutual Funds and unit-holders thereof under the Wealth-tax Act are discussed in para 14 of these explanatory notes.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

8.4 These amendments have come into force with effect from 1st April, 1988 and will, accordingly apply to the assessment year 1988-89 and subsequent years.

[Clause (m) of section 6 and section 27 of the Amending Act, 1987]

[Clause (f) of section 4 of the Amending Act, 1989]

Notes :

1. Further tax concessions under the Income-tax Act have been allowed to the unit-holders of such Mutual Funds by the Finance Act, 1988. These are :

  (i) The benefit of deduction under section 80CC is also extended to the investment made in units of any Mutual Fund if such fund subscribes only to the eligible issue of capital.

(ii) The income from units of a Mutual Fund qualifies for an additional limit of Rs. 3,000 beyond the general limit of Rs. 7,000 under section 80L.

2. These amendments come into force from the 1st day of April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent assessment years.

[In this connection, reference may be made to sections 22 & 25 (d) of the Finance Act, 1988 and also to paras 27.1 (page 32) and 29.5 and 29.6 (pages 39 & 40) of the explanatory notes on the Finance Act, 1988 (Circular No. 528)].

DEDUCTION OF TAX AT SOURCE IN RESPECT 
OF CERTAIN INCOMES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

9.1 The Amending Act, 1987, has made some amendments in the provisions relating to deduction of tax at source from certain incomes. These are discussed in the following sub-paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Deduction of tax at source from interest and salaries, etc., paid by a firm to its partners (sections 194A and 194B)

9.2 Under the old provisions of clause (iv) of sub-section (3) of section 194A of the Act, tax was not to be deducted at source from any interest credited or paid by a firm to its partners. Since under the scheme of assessment of a firm and its partners, as introduced by the Amending Act, 1987, tax was required to be deducted at source from interest and salary, etc., paid by the firm to its partners, the said clause (iv) of sub-section (3) of section 194A was omitted by the Amending Act, 1987. Further, the Amending Act, 1987 also inserted a new section 194E in the Act to provide for deduction of tax at source from interest, salary, etc., paid by a firm to its partners.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

9.3 Since, this scheme of assessment of firms and partners has been withdrawn by the Amending Act, 1989, clause (iv) of sub-section (3) of section 194A has been inserted back and the new section 194E has been omitted retrospectively, with effect from 1st April, 1988 by the Amending Act, 1989. Thus, the old provisions in this regard have been restored.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Non-deduction of tax at source from payments made to a Mutual Fund or from payments made by a Mutual Fund to its unit-holders (sections 196 and 196A)

9.4 Under the old provisions of section 196, no tax was to be deducted at source from any sums payable to the Government or to the Reserve Bank of India or to a corporation established by or under a Central Act, the income of which was exempt from income-tax.

Since the Amending Act, 1987, has provided tax concessions to Mutual Funds set up by a public sector bank or a public financial institution by exempting their income under a new clause (23D) inserted in section 10, it is but natural that no tax should be deducted at source from sums payable to such Funds. Further, section 80L provides for deduction in respect of sums payable by Mutual Fund to its unit-holders in regard to units held by them. Mutual Funds are set up to mobilise the savings of small and medium range investors for investment in equities and other securities income whereof is generally not liable to tax by virtue of deduction provided in section 80L. It is, therefore, proper that no tax is deducted from sums payable by such funds to their unit-holders. The Amending Act, 1987 has, therefore, substituted two new sections 196 and 196A in place of the existing section 196 to provide as under :

  (i) The provisions of new section 196 are essentially the same as those of the existing section, except that a new clause (iv) has been inserted to provide that no tax shall be deducted at source from any sum payable to a Mutual Fund specified under section 10(23D).

(ii) A new section 196A provides that no tax shall be deducted at source by a public sector bank or a public financial institution from any sums payable to the unit-holders of its Mutual Fund income of which is exempt from tax under section 10(23D).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

9.5 These amendments have come into force with effect from 1st April, 1988.

[Sections 73 to 75 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Further amendments to section 196A by the Amending Act, 1989

9.6 The Amending Act, 1989, has again substituted the said section 196A by another new section 196A, which consists of two sub-sections. Reasons for the same are discussed below :�

  (i) The earlier section provided for non-deduction of tax from payments made by a public sector bank or a public financial institution referred to in section 10(23D) from any sums payable to the unit-holders of a Mutual Fund. It was, however, pointed out that such a mutual fund, though set up by a public sector bank or a public financial institution, is normally administered by a trustee, which will not be a public sector bank or a public financial institution. For example, the Mutual Fund set up by the State Bank of India is administered by a trustee appointed by it, namely, SBI, Capital Markets Ltd. Since the latter is neither a public sector bank nor a public financial institution, on strict legal interpretation of the earlier section, exemption from deduction of tax at source will not be available in respect of payments made by it to the unit-holders of the SBI Mutual Fund. Therefore, to remove this unintended hardship, sub-section (1) of the new section 196A provides, without mentioning the persons making payment, that no deduction of tax shall be made from any income payable in respect of units of a Mutual Fund, specified under section 10(23D), to its unit-holders.

(ii) The earlier section 196A provided for non-deduction of tax in respect of payment to all the unit-holders of a Mutual Fund. However, if the unit-holder is a foreign company, it does not get the benefit of deduction under section 80L and thus, no part of its income is exempt. Moreover, section 115A of the Act has been amended by the Amending Act of 1989, to levy a straight tax @ 25 per cent on the income of a foreign company received in respect of units of a Mutual Fund, which are purchased in foreign currency. Consequently, sub-section (1) of the new section 196A, substituted by the Amending Act, 1989, does not exempt from deduction of tax at source the income received by a foreign company in respect of units of a Mutual Fund. Sub-section (2) of the said section 196A further provides that where the unit-holder is a foreign company, the person responsible for making the payment will deduct income-tax thereon @ 25 per cent at the time of credit of such income to the account of the payee or at the time of payment thereof in cash  or by issue of a cheque or draft or any other mode, whichever is earlier. These amendments have come into force on the date of President�s assent to the Amending Act of 1989, i.e., 15th March, 1989.

[Sections 30 to 32 of the Amending Act, 1989]

ADVANCE PAYMENT OF TAX

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.1 The Amending Act, 1987 has introduced major changes in the provisions relating to advance payment of tax with a view to simplifying and rationalising these provisions. The main features of the new provisions are :�

  (i) Advance tax is now to be paid by the assessee on the current income including capital gains and income of casual nature referred to in section 2(24)(ix) which were hitherto not liable to the payment of advance tax.

(ii) Various income limits applicable to different categories of persons for being liable for payment of advance tax have been replaced by a single provision whereby advance tax is payable by a person only if the liability to pay advance tax is Rs. 1,500 or more.

(iii) The existing requirement of filing statements/estimates of income by the assessees, has been dispensed with. Assessees will just deposit the advance tax on the basis of their calculations.

(iv) With the adoption of financial year as the uniform previous year for all the assessees, advance tax will now be payable in all cases in three instalments due on 15th Sept., 15th Dec. and 15th March.

The amendments made to various sections relating to payment of advance tax are discussed in the following sub-paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new sections 207 and 208 relating to liability for payment of advance tax

10.2 Under the old provisions of section 207, advance tax was payable on income other than income chargeable under the head �Capital gains� and income of casual nature referred to in section 2(24)(ix). The exclusion of these incomes was due to the fact that these were not income of regular nature and could not reasonably be foreseen. The exclusion, however, meant that part of the income liable to tax was left uncovered by advance tax. Moreover, there is now no justification for leaving these items of income out of the advance tax net, because even such incomes accruing to the assessee, at least till the date of last instalment, which is now 15th March in all cases, will be known to the assessee and he can very well pay advance tax thereon in the last instalment. The Amending Act, 1987 had, therefore, substituted a new section 207 to provide that advance tax shall be payable during any financial year on the current income of the assessee which would be chargeable to tax for the assessment year immediately following the financial year. This will include all items of income liable to be included in the assessee�s total income. Thus, capital gains and incomes of casual nature referred to in section 2(24)(ix) will also be taken into account while estimating the current income for payment of advance tax.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.3 Under the old provisions of section 208, the liability to pay advance tax was attracted in case the income liable to advance tax exceeded the following limits:�

  (i) Rs. 2,500 in the case of a company or a local authority.

(ii) Rs. 20,000 in the case of a registered firm.

(iii) Rs. 12,000 in the case of a HUF, which has at least one member, whose income exceeds Rs. 18,000.

(iv) Rs. 18,000 in any other case.

In cases at (iii) & (iv) above, if the advance tax payable did not exceed Rs. 1,500, the assessee was not required to pay any advance tax.

The Amending Act, 1987, has substituted a new section 208, which has simplified the provisions by abolishing all these income limits. The new section provides that advance tax shall be payable during the financial year in every case, irrespective of the status of the assessee, where the amount of such tax payable by the assessee amounts to Rs. 1,500 or more.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Method of computation of advance tax (section 209)

10.4 The old provisions of section 209 laid down the method for computation of advance tax, either by the Income-tax Officer by sending an order under section 210 to the assessee for payment of advance tax, or by the assessee by filing the statement/estimate of advance tax under the provisions of section 209A or 212 with the Income-tax Officer, and paying the advance tax accordingly. Capital gains and income of casual nature referred to in section 2(24)(ix) were specifically excluded while ascertaining the income on which advance tax was to be computed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.5 The old sections 209A and 212 contained detailed provisions which were different for old and new assessees in regard to filing of statement, estimate or revised estimates, etc. of advance tax payable by them, on the basis of which the assessees paid advance tax during the financial year. These provisions were very complex and became unnecessary under the new scheme of payment of advance tax introduced by the Amending Act, 1987, under which assessees have themselves to pay advance tax in three instalments. In case of default, a mandatory interest @ 2 per cent p.m. and in case of deferment of instalment of advance tax, a mandatory interest @ 1� per cent p.m. is to be charged in all cases under the provisions of the new sections 234B and 234C introduced by the Amending Act, 1987. The Amending Act, 1987 has, therefore, omitted sections 209A and 212, thus dispensing with the requirement of filing of statements/estimates of advance tax payable by the assessees. This saves the assessees as well as the Department from enormous paper work involved.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.6 In view of the omission of sections 209A and 212, the Amending Act, 1987, has substantially amended the provisions of section 209. The amended section lays down the method of computing advance tax payable during a financial year as follows :�

(a) Where the calculation is made by the assessee for paying the advance tax, either of his own accord or on the basis of the estimate of his current income which may be filed after the assessee is served with a notice by the Assessing Officer under section 210(3) or (4) for payment of advance tax, income-tax on the current income shall be calculated at the rates in force in that financial year.

(b) Where calculation is made by the Assessing Officer for making an order under section 210(3) requiring the assessee to pay advance tax, he shall adopt the total income assessed by way of regular assessment of the latest previous year or the total income returned by the assessee for any subsequent previous year, whichever is higher, and calculate income-tax thereon at the rates in force in that financial year.

  (c) Where calculation is made by the Assessing Officer for making an amended order under section 210(4) on the basis of a return filed or a regular assessment completed subsequently for a previous year later than that adopted in an order under section 210(3), income-tax shall be calculated on the total income declared in such subsequent return or total income determined in such subsequent regular assessment, as the case may be, at the rates in force in that financial year.

(d) The income-tax calculated under any of the above clauses shall, in each case, be reduced by the amount of income-tax which would be deductible at source under any provisions of the Act on any income which has been included in the current/total income, determined under any of the above clauses. (This provision was there even in the old section 209, before its amendment by the Amending Act, 1987).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.7 It may be pointed out that the amended section 209 does not exclude the capital gains and income of casual nature referred to in section 2(24)(ix) while determining the total income on which advance tax is to be computed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 210 relating to payment of advance tax by the assessee of his own accord or in pursuance of an order of Assessing Officer

10.8 Under the old provisions of section 210, the Income-tax Officer was empowered to pass an order requiring an assessee, who had been previously assessed by way of regular assessment, to pay advance tax. The Income-tax Officer was also empowered to issue a revised order for payment of advance tax, at any time up to fifteen days before the date on which the last instalment of advance tax was payable, in cases where after the issue of the original order tax was paid by the assessee under section 140A or a regular assessment of the assessee was completed for a previous year later than the previous year on the basis of which the original order was issued.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.9 The Amending Act, 1987, has substituted a new section 210 which deals with payment of advance tax by the assessee of his own accord or in pursuance of an order of the Assessing Officer. In view of the omission of sections 209A and 212, the new section 210 casts the responsibility of payment of advance tax on the assessee without his having to submit his statement/estimate of advance tax payable. Where, however, the Assessing Officer sends an order for payment of advance tax to the assessee, the assessee may file an estimate of his current income and pay advance tax accordingly. The provisions of various sub-sections of the new section 210 are briefly explained below :

  (i) Sub-section (1) provides that any person who is liable to pay advance tax under section 208 shall suo motu  compute advance tax payable on his current income and pay the same in instalments as specified in section  211. He is not required to file any statement/estimate of advance tax payable.

(ii) Sub-section (2) allows an assessee to subsequently revise the advance tax payable in the remaining instalments in accordance with the revised estimate of his current income, without any requirement of filing a revised estimate.

(iii) Sub-section (3) empowers the Assessing Officer to pass an order requiring an assessee, who had earlier been assessed to income-tax, but has not paid any advance tax during the relevant financial year, to pay advance tax calculated in the manner laid down in section 209. Such an order must be passed during the financial year, but not later than the last day of February.

(iv) Sub-section (4) empowers the Assessing Officer to pass a revised order for payment of advance tax by the assessee where, subsequent to the passing of the original order, but before the first day of March, a return of income in respect of any later year has been furnished or any regular assessment for a later year has been made.

(v) Sub-section (5) enables the assessee to furnish his own estimate of current income in order to reduce the amount of advance tax demanded by the Assessing Officer under sub-section (3) or (4).

(vi) Sub-section (6), requires the assessee to furnish an estimate of his current income where the amount of advance tax payable on the current income is likely to be higher than the advance tax demanded by the Assessing Officer under sub-section (3) or (4).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 211 relating to instalments of advance tax

10.10 The old provisions of section 211 specified different dates for payment of instalments of advance tax due depending on whether the previous year of the assessee ended on or before the 31st day of December, or thereafter. The advance tax was payable in equal instalments.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.11 In view of the substitution of new section 3 in the Act which provides that the financial year (year ending on 31st March) will be the previous year for all the assessees, the Amending Act, 1987, has substituted a new section 211 to provide uniform due dates for payment of instalments of advance tax, namely, 15th Sept., 15th December and 15th March. The new section also provides that not less than 20 per cent, 50 per cent and 100 per cent of the advance tax due shall be paid by 15th Sept, 15th December and 15th March respectively. In order to remove the controversy as to whether the advance tax paid within the financial year after the due date of last instalment will constitute advance tax or not, the new section further provides that any amount paid by way of advance tax on or before the 31st of March of the relevant financial year shall also be treated as advance tax paid for that year. The provision also enables the assessee to pay advance tax on capital gains or income of casual nature referred to in section 2(24)(ix), which may accrue to the assessee till the last date of the financial year.

 DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Omission of section 213 containing special provisions relating to commission receipts

10.12 The old provisions of section 213 provided for deferment of payment of instalments of advance tax in respect of commission  income upto the date of receipt of the commission. Since the provisions of this section are no longer necessary in view of the new provisions for payment of advance tax and consequences of default, which are much simpler and milder, the Amending Act, 1987 has omitted this section.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 218 relating to when assessee deemed to be in default

10.13 The old provisions of section 218 dealt with the circumstances under which the assessee was deemed to be in default for payment of advance tax. The Amending Act, 1987 has substituted a new section 218, which contains new provisions in this respect consequential to the changes made in the scheme of advance tax, as explained in the preceding paragraphs.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

10.14 These amendments have come into force with effect from 1st April, 1988.

[Sections 76 to 81 and 84 of the Amending Act, 1987]

Notes :

  (i) The Amending Act, 1989, has made an amendment in section 209 of the Act, which is consequential to the insertion of section 206C relating to collection of tax at source, with effect from 1st June, 1988 by the Finance Act, 1988.

       The consequential amendment in section 209 also comes into force with retrospective effect from 1st June, 1988.

[Section 35 of the Amending Act, 1989]

(ii) The provisions of section 214 relating to interest payable by the Government on the excess amount of advance tax paid by the assessee have been replaced, with effect from the assessment year 1989-90, by the provisions of a new section 244A, which provides for interest payable by the Government on all refunds. Similarly the provisions of sections 215, 216 and 217 relating to interest payable by the assessee for defaults in payment of advance tax have been replaced, with effect from the assessment year 1989-90, by the provisions of new sections 234B and 234C, which provide for charge of mandatory interest for such defaults. These will be explained at the appropriate place in Part II of the explanatory notes.

POWER  of  THE  CENTRAL  GOVERNMENT  TO 
REMOVE  DIFFICULTIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Power to remove difficulties in giving effect to the provisions of the Income-tax Act, as amended by the Amending Act, 1987

11.1 Under the old provisions of section 298, the Central Government could by general or special order, take action, not inconsistent with the provisions of the Act for removing any difficulty that might arise in giving effect to the provisions of the Act. The Amending Act, 1987 has inserted two new sub-sections (3) and (4) in this section to empower the Central Government to remove any difficulty that may arise in giving effect to the provisions of the Income-tax Act, as amended by the Amending Act, 1987, by an order, which shall not be inconsistent with such provisions. Such an order can be passed within three years from the first day of April 1988, i.e., by 31st of March, 1991. Every such order passed has to be laid before each House of Parliament.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Issue of the Income-tax (Removal of Difficulties) Order, 1989

11.2 Taking recourse to the provisions of section 298(3), the Income-tax (Removal of Difficulties) Order, 1989 was passed vide GSR No. 376(E) dated 23-3-1989 to remove certain difficulties in the application of the provisions of the new section 143 relating to procedure of assessment and of the amended section 275 relating to time limitation for imposing penalties, as substituted/amended by the Amending Act, 1987. The difficulties that had arisen are briefly explained below:�

  (i) A large number of problems were arising from the application of the provisions of new section 143 coming into effect from 1-4-1989, to the assessments for the assessment year 1988-89 or earlier assessment years, which may be pending on 1-4-1989, or in respect of which returns may be filed on or after 1-4-1989. These problems related to the charge of additional tax @ 20 per cent provided in sub-section (1A) and non-issue of refunds in regular assessments under the provisions of sub-section (3) of the new section 143, services of notice under sub-section (2) of the new section 143 within the limitation period of six months and the applicability of the provisions relating to the charge of mandatory interest for late/non-filing of return and default in the payment of advance tax contained in sections 234A to 234C, which are intimately connected with the provisions of the new section 143, but are applicable only to the assessment year 1989-90 and subsequent assessment years.

(ii) Similarly, it was found that it was not practicable to apply the amended provisions of section 275, coming into force from 1-4-1989 which have substantially reduced the time limit for completion of penalty proceedings from the earlier two years to six months, to all the old penalty proceedings pending on 1-4-1989. In view of the reduced limitation period available under the amended provisions, a very large number of penalty proceedings, which were more than six months old, would have to be completed by 31-3-1989.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

11.3 The Income-tax (Removal of Difficulties) Order, 1989, passed on 23-3-1989, therefore, removed the above difficulties by providing as under :�

  (i) The provisions of section 143, as they stood before commencement of the Amending Act, 1987, shall apply in respect of the assessments for the assessment year 1988-89 and earlier assessment years.

(ii) The provisions of section 275, as they stood before the commencement of the Amending Act, 1987, shall apply in respect of any action for imposition of penalty initiated on or before the 31st day of March, 1989.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

11.4 The Wealth-tax and Gift-tax (Removal of Difficulties) Orders, 1989 were also simultaneously passed on 23-3-1989. These are discussed in paras 15 and 17 of these explanatory notes.

[Section 123 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Consequential amendments

12.1 Certain amendments of consequential nature have also been carried out in the Act, as shown in the following table :�

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

12.2 Section 126(13) of the Amending Act, 1987 had incorrectly made certain consequential amendments to section 132(1) proviso and section 132(1A) of the Act. The said section 126(13) of the Amending Act, has therefore, been omitted by section 95(o) of the Amending Act, 1989.

AMENDMENTS TO THE WEALTH-TAX ACT, 1957

Direct Tax Laws (Amendment) Act, 1987-II

13. The Amending Act, 1987, has made several amendments to the provisions of the Wealth-tax Act in order to bring its provisions relating to designation, appointment, control and jurisdiction of authorities, tax incentives to Mutual Funds and power of the Central Government to remove difficulties, broadly in line with the corresponding amendments made to the provisions in the Income-tax Act by this Amending Act. These amendments came into effect from 1st April, 1988. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Finance Act, 1988 and the Amending Act, 1989. The Table below shows the provisions of the Wealth-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987, or the Finance Act, 1988 or the Amending Act, 1989, which have carried out the necessary amendments:

*The provisions in respect of items at Sl. Nos. 3, 9 and 10 which are Star-marked are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-II

Tax incentives to Mutual Funds set up by Banks, etc.

14.1 The Amending Act, 1987, has provided the following tax concessions in respect of a Mutual Fund specified in section 10(23D) of the Income-tax Act :�

           (i)       A new clause (xxiva) has been inserted in sub-section (1) of section 5 of the Act, relating to exemptions under the Wealth-tax Act, to provide that the value of units of a Mutual Fund income of which is exempt under section 10(23D) of the Income-tax Act, 1961 shall not be included in the net wealth of the unit-holders for wealth-tax purposes. Sub-section (1A) of the said section 5 has also been amended to include reference of new clause (xxiva) in that sub-section, so that exemption from wealth-tax in respect of units of a Mutual Fund will be subject to the overall ceiling of Rs. 5 lakhs, along with other assets, specified in the said sub-section (1A).

           (ii)      A new clause (j) has been inserted in section 45 of the Act, relating to exemption from the provisions of the Wealth-tax Act, to provide that no wealth-tax shall be levied in respect of the net wealth of such a Mutual Fund.

Direct Tax Laws (Amendment) Act, 1987-II

14.2 These amendments have come into force with effect from 1st April, 1988 and will, accordingly, apply to the assessment year 1988-89 and subsequent years.

[Sections 130 and 158 of the Amending Act, 1987 and section 88(i) of the Finance Act, 1988]

Direct Tax Laws (Amendment) Act, 1987-II

Power of the Central Government to remove difficulties

15.1 The Amending Act, 1987 has inserted a new section 47 in the Act to empower the Central Government to remove any difficulty that may arise in giving effect to the provisions of the Wealth-tax Act, as amended by the Amending Act, 1987. The provisions of the said section 47 are exactly on the same lines as those of the new sub-sections (3) and (4) inserted in section 298 of the Income-tax Act.

Direct Tax Laws (Amendment) Act, 1987-II

15.2 Under the provisions of the said section 47, the Wealth-tax (Removal of Difficulties) Order, 1989 was passed, vide GSR No. 378 (E) dated 23-3-1989, to provide that the provisions of section 16, as they stood before commencement of the Amending Act, 1987 shall apply in respect of assessments for the assessment year 1988-89 and earlier assessment years. This was in order to remove certain difficulties in the application of the provisions of the new section16 relating to procedure of assessment, on the same lines as done by the Income-tax (Removal of Difficulties) Order, 1989, passed simultaneously in respect of the provisions of the new section 143 of the Income-tax Act (Please see paras 11.2-11.4 ante).

Direct Tax Laws (Amendment) Act, 1987-II

15.3 The Wealth-tax (Removal of Difficulties) Order, 1989, however, does not provide for removing the difficulties in respect of limitation for imposition of penalties under the Wealth-tax Act, as has been done by the Income-tax (Removal of Difficulties) Order, 1989 in respect of the amended provisions of section 275 of the Income-tax Act. This is so because the Amending Act, 1989 has inserted a new sub-section (6) in section 18 of the Wealth-tax Act, relating to certain penalties, to provide that the old provisions of that section before amendment [which include the old limitation provisions contained in sub-section (5) of that section] shall apply in relation to any assessment for the assessment year 1988-89 or any earlier assessment year. The only other section in the Wealth-tax Act relating to penalties is section 18A which does not contain any limitation provisions. It was, therefore, not necessary to make any provision in this respect in the Wealth-tax (Removal of Difficulties) Order, 1989.

[Section 159 of the Amending Act, 1987]

AMENDMENTS TO THE GIFT-TAX ACT, 1958

Direct Tax Laws (Amendment) Act, 1987-ii

16. The Amending Act, 1987 has made certain amendments, effective from 1st April, 1988, to the provisions of the Gift-tax Act in order to bring its provisions relating to designation, appointment, control and jurisdiction of authorities and power of the Central Government to remove difficulties, broadly in line with the corresponding provisions in the Income-tax and Wealth-tax Acts, as amended by the Amending Act, 1987. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Finance Act, 1988 and the Amending Act, 1989. The table on p. 1340 shows the provisions of the Gift-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. It also indicates the sections of the Amending Act, 1987 or the Finance Act, 1988 or the Amending Act of 1989, which have carried out the necessary amendments.

*The provisions in respect of item at Sl. No. 6, which is star-marked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-ii

Power of the Central Government to remove difficulties

17.1 The Amending Act, 1987 has inserted a new section 47 in the Act to empower the Central Government to remove any difficulty that may arise in giving effect to the provisions of the Gift-tax Act, as amended by the Amending Act, 1987. The provisions of the said section 47 are exactly on the same lines as those of the new sub-sections (3) and (4) inserted in section 298 of the Income-tax Act.

Direct Tax Laws (Amendment) Act, 1987-ii

17.2 Under the provisions of the said section 47, the Gift-tax (Removal of Difficulties) Order, 1989 was passed, vide G.S.R. No. 377 (E), dated 23-3-1989, to provide that the provisions of section 15, as they stood before the commencement of the Amending Act, 1987 shall apply in respect of assessments for the assessment year 1988-89 and earlier assessment years. This removed certain difficulties in the application of the provisions of the new section 15 relating to procedure of assessment, on the same lines as done by the Income-tax (Removal of Difficulties) Order, 1989, passed simultaneously in respect of the provisions of the new section 143 of the Income-tax Act (please see paras 11.2-11.4 ante).

Direct Tax Laws (Amendment) Act, 1987-ii

17.3 The Gift-tax (Removal of Difficulties) Order, 1989, however, does not provide for removal of difficulties in respect of limitation for imposition of penalties under the Gift-tax Act as has been done by the Income-tax (Removal of Difficulties) Order, 1989 in respect of the amended provisions of section 275 of the Income-tax Act. This is for the reason that the Amending Act, 1989, has inserted a new sub-section (6) in section 17 of the Gift-tax Act, relating to certain penalties, to provide that the old provisions of that section before amendment (which did not contain any limitation provision) shall apply in relation to any assessment for the assessment year 1988-89 or earlier assessment years. The only other section in the Gift-tax Act relating to penalties is section 17A, which does not contain any limitation provision. It was, therefore, not necessary to make any provision in this respect in the Gift-tax (Removal of Difficulties) Order, 1989.

[Section 185 of the Amending Act, 1987]

AMENDMENTS TO THE COMPANIES (PROFITS) SURTAX ACT, 1964

Direct Tax Laws (Amendment) Act, 1987-ii

18. The Amending Act, 1987, has made some amendments, effective from 1st April, 1988, to the provisions of the Companies (Profits) Surtax Act in order to bring its provisions relating to designation, appointment, control and jurisdiction of authorities, broadly in line with the corresponding provisions in the Income-tax Act, as amended by the Amending Act, 1987. The Table below shows the provisions of the Companies (Profits) Surtax Act that have been so amended and the corresponding provisions if any, in the Income-tax Act. It also indicates the sections of the Amending Act, 1987, which have carried out the necessary amendments.

III

Amendments at a glance*

Amendments  to  the  income-tax  Act

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Financial year as uniform previous year for all assessees

2.1 Change in the definition of previous year (new section 3) - Under the old provisions of section 3, where the assessee did not maintain any books of account, previous year meant the financial year immediately preceding the assessment year. But, where an assessee maintained books of account, he could have a previous year (of not more than 12 months) of his choice. The assessee could even choose different  previous years for different sources of income and also for different businesses carried on by him. The assessees were also allowed to change their previous years with the consent of the Income-tax Officer.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.2 The old system led to a situation where the income earned during the same period by different tax-payers of the same category was subjected to tax in different assessment years and sometimes at different rates. It also opened up a vista for tax avoidance by the tax-payers by adopting different previous years for different sources of income and by changing their previous  years at their convenience and to their advantage.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.3 The Amending Act, 1987, therefore, substituted a new section 3 in the Act to provide for financial year (year ending 31st March) as uniform previous year for all assessees and for all sources of income. Consequently, the provisions regarding change of the previous year are no longer necessary and do not find a place in the new section. Thus, the adoption of the uniform previous year for all the assessees would remove both the maladies mentioned above. It would also facilitate cross-verification of transactions among different assessees, which has become very necessary now in view of the new procedure of assessment, introduced by the Amending Act, 1987, under which all the returns of income will be accepted as such and passing of assessment orders will not be necessary. (Refer paras 5.1 & 5.2 of these Explanatory Notes).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.4 The new section 3 provides that previous year means the financial year immediately preceding the assessment year. It further provides that in the case of a newly set up business or profession or a source of income newly coming into existence during the financial year, the previous year shall begin from the date of setting up or coming into existence  of the new business, profession or new source of income and end with the said financial year. It also provides that in the case of an assessee who has been having a previous year different from the financial year, the transitional previous year, i.e., the previous year relevant for the assessment year 1989-90 will be for a period longer than 12 months. Thus, in the case of an assessee, who closes his accounts on 30th June every year, the transitional previous year for the year 1989-90 will be from 1-7-1987 to   31-3-1989, i.e., it will be for a period of 21 months.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.5 The new section further provides that where the assessee had adopted more than one period as the previous year for the assessment year 1988-89 for different sources of his income, so that more than one period are included in the transitional previous year relevant for the assessment year 1989-90, the longest period shall be regarded as the transitional previous year. This could be explained by the following example:

Example: An assessee has three separate businesses for each one of which he closed his accounts on different dates, say,  30-6-1987, 31 12-1987 and 31-3-1988 for the assessment year 1988-89. For the assessment year 1989-90, the following periods will be included in the previous year:

(1) 1-7-1987 to 31-3-1989 (21 months) for 1st business

(2) 1-1-1988 to 31-3-1989 (15 months) for 2nd business

(3) 1-4-1988 to 31-3-1989 (12 months) for 3rd business

The longest of the three periods is that starting from 1-7-1987 to 31-3-1989 (21 months) and this will be the previous year for all the three businesses for the assessment year 1989-90.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.6 Amendments made by the Amending Act, 1989 to provide for a new business or profession or source of income coming into existence between 1-4-1987 to 31-3-1988 - The new section 3, substituted by the Amending Act, 1987, did not provide for a situation where a new business or profession or a source of income newly comes  into existence between the period 1-4-1987 to 31-3-1988 and where the accounts are not closed on 31-3-1988. The Amending Act, 1989 has, therefore, further amended section 3 by inserting 2nd and 3rd provisos to sub-section (2) of the section to provide that:

  (i) Where a new business or profession is set up or a source of income newly comes into existence on or after 1-4-1987, but, before 1-4-1988, and where the accounts have not been closed on 31-3-1988, the previous year in relation to the assessment year 1989-90 shall be reckoned from the date of setting up of the new business or profession or the date on which the source of income newly comes into existence on the 31st day of March, 1989.

(ii) Where the assessee has already been having one or more periods as the previous years for the assessment  year 1988-89 in respect of different source or sources of income, in addition to the new business, profession or sources of income referred to above, the previous year in relation to assessment year 1989-90 shall be reckoned separately in the manner specified in the sub-section in respect of each such source of income and the longer or the longest of such periods so reckoned shall be the previous year for the said assessment year.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.7 The above provisions can be  clarified by the following examples:�

Example 1 :

An assessee started a new business on 1-7-1987. If he closes his accounts on 31-3-1988, his previous year for the assessment year 1989-90 will be the normal period of 12 months (1-4-1988 to 31-3-1989). However, if he does not close his accounts on 31-3-1988, then his previous year for the assessment year shall be the period 1-7-1987 to 31-3-1989 (i.e., a period of 21 months).

Example 2 :

The assessee in Example 1, who did close the accounts of his new business on 31-3-1988, also had two other businesses already in existence for which the previous year for the assessment year 1988-89 ended as follows :

(1) First business - year ended 30-9-1987.

(2) Second business - year ended 31-12-1987.

For the assessment year 1989-90 the different periods included in the relevant previous year shall be :�

(1) For new business� 1-7-1987 to 31-3-1989 (21 months).

(2) For second business (old)�1-10-1987 to 31-3-1989 (18 months)

(3) For second business (old)�1-1-1988 to 31-3-1989 (15 months).

The longest of the three periods, i.e., from 1-7-1987 to 31-3-1989 (21 months) shall be the previous year for all the three sources of income for the assessment year 1989-90.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.8 Transitory provisions to remove the hardships during the extended transitional previous year for the assessment year 1989-90 (Insertion of Tenth Schedule) - The Amending Act, 1987 also inserted a Tenth Schedule in the Income-tax Act, which provides transitory provisions to avoid hardships in cases where the transitional previous year relevant for the assessment year 1989-90 exceeds a period of 12 months. The said Tenth Schedule makes the following transitory provisions :

  (i) The monetary limits mentioned in various sections of the Income-tax Act which are enumerated in the Table given in rule 3, shall be increased during the extended transitional previous year, in proportion to the number of months in the said transitional previous year.

(ii) Where the transitional previous year includes a part of a month, then if such part is 15 days or more, it shall be increased  to one complete month, and if such part is less than 15 days, it shall be ignored.

(iii) Rule 4 provides that where the transitional previous year consists of a period of 18 months or more, the number of days specified in sub-section (1) of section 6 for determining the residential status of the individual, namely, 182 days and 90 days shall be increased to 273 days and 135 days respectively.

(iv) Rule 5 provides that where, in a transitional previous year, assessee�s income under the head �Profits and gains of business or profession� is included in the total income for a period of 13 months or more, the depreciation allowance under section 32(1)(ii) shall be increased proportionately. (Refer Example 1 in para 2.11).

       However, while allowing enhanced depreciation care should be taken that the total amount of depreciation allowed during the extended transitional previous year, including the depreciation allowed in earlier years, does not exceed the actual cost of the asset. Similar care will also have to be taken where 100 per cent depreciation is allowable one certain block of assets under the rate schedule for depreciation  provided in Appendix I to the Income-tax Rules or where 100 per cent depreciation is available on machinery or plant costing upto Rs. 5,000 under the provisions of the proviso to section 32(1)(ii).

       Subject to the above, enhanced depreciation shall be admissible in respect of the assets purchased during the extended transitional year, even if the assets are purchased towards the end of such year and used for a small period only. Thus, for example, where the extended transitional previous year consists of 18 months (1-10-1987 to 31-3-1989), enhanced depreciation being 1.5 times the normal depreciation shall be allowed in respect of machinery or plant purchased and installed in the month of March 1989.

(v) Rule 6 provides that tax payable on the total income of transitional previous year shall be calculated at the average rate of tax on the amount obtained by multiplying such total income by a fraction of which the numerator is twelve and the denominator is the number of months in the transitional previous year, as if the resultant amount were the total income. In simple language the tax shall be calculated in the following manner:�

(1) Compute the total income of the whole transitional previous year under the provisions of the Income-tax Act.

(2) Divide the income so computed by the number of months in the transitional previous year and multiply it by 12.

(3) Agricultural income, if any, derived during the whole transitional previous year should likewise be divided by the number of months in the transitional previous year and multiplied by twelve.

(4) Compute the tax payable on such total income (obtained in step No. 2) taking into consideration the net agricultural income, if any (obtained in step No. 3).

(5) The average rate of tax will be

= Tax payable (step No. 4)/ Total income for 12 months (step No. 2)

(6) Tax payable on the total income of the transitional previous year shall be derived by multiplying such total income (obtained in step No. 1) by the average rate of tax (obtained in step No. 5) (Refer Example 1 in para 2.11)

(vi) Rule 7 empowers the Board, where the transitional previous year is longer than 12 months, to remove genuine hardship, by general or special order, by granting appropriate relief in any case or class of cases.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.9 Amendments made by the Amending Act, 1989 to the Tenth Schedule to remove certain hardships and anomalies - Some hardships and anomalies were pointed out in the provisions of the Tenth Schedule, as inserted by the Amending Act, 1987. Therefore, in order to remove the same, the Amending Act, 1989 has made the following amendments to the provisions of the Tenth Schedule:�

  (i) A new Table has been substituted in rule 3 of the original Table, earlier inserted by the Amending Act, 1987. Some monetary limits mentioned in various sections of the Act, which were not included in the original Table, have now been included. Opportunity has also been taken to correct some references to sections  or amounts.

       It may be mentioned that the following amounts have also been included in the new Table for being proportionately increased during the extended transitional previous year:�

       Section 35A�1/14th of the amount of capital expenditure.

       Section 35AB�1/6th or 1/3rd of the amount paid as lump sum consideration.

       Section 35D�1/10th of the amount of certain preliminary expenses.

       Section 80C(3)�1/10th of the actual capital sum assured.

       While allowing the enhanced amounts mentioned above during the extended transitional previous year, care should be taken that the total deduction for expenditure or for payment of premia allowed, including deductions allowed in earlier years, does not exceed the total amount of expenditure incurred or the total amount of premia paid. Also having allowed the enhanced deduction during the extended transitional previous year, care should also be taken to correspondingly reduce the last instalment allowable in respect of the same in the subsequent year.

(ii) Two new provisos have been inserted in rule 3 to provide that:�

(1) the amount of Rs. 10,000 mentioned in column (2) of the table against section 48(2) shall be increased during the transitional previous year only where the long-term capital gain arises as a result of two or more transfers of long-term capital assets and out of these, at least one transfer is made during the initial period of twelve months and the remaining transfer or transfers is or are made beyond the said period of twelve months comprised within the transitional previous year;

(2) where more than one period in respect of different sources of income are included in the transitional previous year, the amounts mentioned in column (2) of the aforesaid Table shall be increased to such extent and in such manner as the Board may prescribe having regard to the length of the period or periods included in the transitional previous year in respect of different sources of income, the length of the transitional previous year and other relevant factors.

       In this regard, a new rule  125 has been inserted in the Income-tax Rules, 1962, vide the Income-tax (Sixth Amendment) Rules, 1989 issued under Notification No. S.O. 361(E) dated 18-5-1989, to indicate as to which monetary limits mentioned in the Table shall be increased according to the length of the transitional previous year and which monetary limit mentioned in the Table shall be increased according to the length of the period in respect of the source of income to which they relate, which is included in the transitional previous year.

(iii) A new rule 4 provides that the time limit of 60 days mentioned in  sub-section (1) of section 6 of the Act will be increased to 90 days where the extended transitional previous year comprises a period of 18 months or more.

(iv) A new rule 5 further makes the following provisions in respect of depreciation allowance during the extended transitional previous year:�

(1) increased depreciation will also  be available in those cases where depreciation is allowable while computing income under the head �Income from other sources�,

(2) depreciation will be allowable on �block of assets� instead of on �building, machinery, plant or furniture�, and

(3) where more than one period in respect of income under the head �Profits and gains of business or profession� or under the head �Income from other sources� are included in the extended transitional previous year, depreciation allowance shall be calculated separately for each such period included in the said transitional previous year and the said depreciation allowance shall be increased, where necessary, by multiplying it by a fraction of which the numerator is the number of months in such period (after excluding the number of months included in the period in relation to which depreciation has already  been allowed or is allowable for the assessment year 1988-89) and the denominator is 12 (refer Example 3 in para 2.11).

       Before this amendment, it was possible that where the assessee had a period of 15 months for one business and 21 months for another business, then he could avail of depreciation allowance for 21 months in respect of both the  businesses, because his transitional  previous year shall be of 21 months. But now the depreciation shall be calculated in respect of the two periods (of 15 months and 21 months) separately. This loophole is, therefore, being plugged.

(v) Rule 6 has been amended to provide that where more than one period in respect of different sources of income are included in the extended transitional previous year, then the tax shall be payable at the average rate of tax calculated in accordance with the provisions of this rule on the total income of the extended transitional previous year, after excluding from such total income the income relatable to any such period or periods which has already been included or is includible in the total income of the assessment year 1988-89 (refer Examples 2 and 3 in para 2.11).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.10 Whether there is a compulsion on the assessees to close their accounts on the 31st March - It may be clarified that under the provisions of the new section 3 there is no compulsion on any assessee to close his accounts on 31st March only. All that the section requires is that for the purposes of income-tax, income will have to be declared for the year ending 31st March. Therefore, if for any reasons personal, religious, or on any other ground an assessee wants to continue to close his accounts on a date different from 31st March, he can still do so. However, in such a case the assessee will be required to make up his accounts on 31st March also for the purpose of furnishing the return of income. Therefore, although it would be convenient to both the assessees as well as to the Department, if the assessees close their accounts on 31st March, if any assessee does not do so and submits 2 sets of accounts along with his return of income for the year ending 31st March, the same should be entertained by the Assessing Officer.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.11 The computation of total income of the extended transitional previous year and the calculation of tax thereon according to the provisions of the Tenth Schedule may be illustrated by means of the examples given below :

Example 1

The previous year of an assessee, assessed as an individual, having income from business ended on 30-6-1987 for the assessment year 1988-89. The particulars of his total income for the transitional previous year of 21 months (1-7-1987 to 31-3-1989) for the assessment year 1989-90 are as follows :

Example 2

Suppose an assessee, assessed as an individual, has for each of the assessment years 1988-89 and 1989-90, an annual income of Rs. 2,40,000 from business for which he closes his accounts on 30th June every year, and an annual income of Rs. 1,20,000 from other sources for which he closes his accounts on 31st March every year. For the assessment year 1989-90 his previous years for the two sources of income are as under :�

Business                    1-7-1987�31-3-1989 (21 months)

Other sources            1-4-1988�31-3-1989 (12 months)

The longer of the two, i.e., the period of 21 months (1-7-1987 to 31-3-1989) will be transitional previous year for both the sources of income for the assessment year 1989-90.

The computation of his total income for the assessment years 1988-89 and 1989-90 and tax payable for the assessment year 1989-90 would be as under :�

Example 3

The assessee, assessed as an individual, has two businesses for which he closes his accounts on 30th June and 31st December every year. Particulars of his income for assessment years 1988-89 and 1989-90 and depreciation claim for the assessment year 1989-90 are as under:�

For the assessment year 1988-89:�

The transitional previous year for the assessment year 1989-90 will be for 21 months for both the businesses i.e., from 1-7-1987 to 31-3-1989.

The assessee�s total income for the assessment year 1989-90 and tax thereon will be computed as under:�

(iv) The above average rate of tax will be applied on the income of the transitional previous year (Rs. 2,10,000) minus income from second business for the period of 6 months, viz., Rs. 50,000 which has already been taxed in the assessment year 1988-89, i.e., Rs. 2,10,000 - Rs. 50,000 = Rs. 1,60,000

(v) Tax payable�1,60,000 � 0.3434 = Rs. 54,944.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

2.12 These amendments come into force with effect from the first day of April, 1989 and will, accordingly, apply in relation to the assessment year 1989-90 and subsequent years.

[Sections 4 and 125 of the Amending Act, 1987]

[Sections 3 and 56 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Consequential amendments to section 4 relating  to charge of income-tax

3.1 Under the old provisions of section 4 of the Act, income-tax was chargeable for the assessment year at the rate or rates prescribed in the relevant Finance Act, in respect of total income of the previous year or previous years of every person.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

3.2 The Amending Act, 1987 has made the following consequential amendments in the section:�

  (i) Reference to �previous years� has been omitted consequent upon the adoption of a uniform previous year for all assessees.

(ii) Mention of �additional income-tax� has also been made in section 4 dealing with the charge of income-tax. Originally, this was consequent upon the charge of additional income-tax under section 158B, which was inserted by the Amending Act, 1987. Although the Amending Act, 1989 omitted section 158B, it inserted a new sub-section (1A) in section 143 to provide for levy of additional income-tax in certain cases where returned income is increased as a result of adjustments mentioned in the proviso to section 143(1)(a). [Refer paras 5.7 to 5.9 of these Explanatory Notes].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

3.3 These amendments come into force with effect from the 1st April, 1989 and will, accordingly, apply to assessment year 1989-90 and subsequent years.

[Section 5 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Procedure for assessment  - Return of income and other related provisions

4.1 Staggering of the dates for filing returns of income and removal of the discretion of the Assessing Officer to extend the dates for filing the returns/[section 139(1)] - Under the old provisions of sub-section (1) of section 139, time limits for filing the returns of income were prescribed depending upon whether or not the assessee had income from business or profession. In the case of persons deriving income from business or profession, the date of filing the return of income was before the expiry of four months from the end of the previous year or before the 30th of June of the relevant assessment year whichever was later, i.e., it could be either 30th June or 31st July. In the case of other persons, not deriving income from business or profession, the date was 30th June. Also, on an application made by the assessee in the prescribed form, the Income-tax Officer was empowered to extend the date for filing the return of income subject to chargeability  of interest under section 139(8).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.2 With the introduction of financial year (year ending 31st March) as the uniform previous year for all assessees, those having income from business or profession would have been obliged to file their returns by 31st July, after closing their accounts on 31st March. This would have resulted in heavy pressure of work on the audit profession, because all those assessees, who are required to get their accounts audited, would have been obliged to do so within a short span of four months. Also, all such returns would have been filed with the Department mostly towards the end of July every year, causing a glut of such returns within a very short period. To remove these difficulties, the Amending Act, 1987 has substituted a new sub-section (1), which staggers the dates for filing the returns of income by different classes of assessees as under :

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.3 The Amending Act has also removed the discretion of the Assessing Officer to extend the dates for filing the returns of income. Consequently, the dates for filing the returns, as mentioned above, are mandatory and cannot be extended.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.4 Omission of sub-section (2) of section 139 - Under the old provisions of section 139, in case any assessee, who had taxable income, failed to file the return voluntarily under sub-section (1), the Income-tax Officer was empowered to issue notice under sub-section (2), calling for the return within 30 days, and an ex parte assessment under section 144 could be completed only if the assessee failed to file the return in response to notice under section 139(2). Thus, an ex parte assessment order could not be passed for assessee�s failure to file the return voluntarily. An intermediate step of the issue of notice was there and the Assessing Officer had to wait till such notice was served upon the assessee and the statutory time limit of 30 days was over before he could complete the assessment ex parte. In order to eliminate the time taken in these legal formalities and also to enforce voluntary  compliance on the  part of the assessees, the Amending Act, 1987 has omitted sub-section (2) of section 139. Simultaneously, section 144 has also been amended so that an ex parte assessment can now be completed for the assessee�s default in filing his return voluntarily under section 139(1), [Refer para 6.1 of these Explanatory Notes].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.5 Provisions relating to filing of loss returns [section 139(3)] - Under the old provisions of sub-section (3), a return of loss incurred under the head �Profits and gains of business or profession� or under the head �Capital gains�, which the assessee wanted to be carried forward, had to be filed by 31st July of the relevant assessment year. Consequent upon the provisions for staggered dates for filing the returns of income in the new sub-section (1), the Amending Act, 1987 has also amended sub-section (3) to provide that such loss returns can also be filed by the due dates mentioned in sub-section (1). In the case of loss returns also, the Assessing Officer has no power to allow extension of time for filing such returns.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.6 Provisions relating to filing of belated or revised returns of income [sub-sections (4) and (5) of section 139] - Under the old provisions of sub-section (4), even if a person did  not file a return of income within the time allowed under sub-section (1) or (2), he could still file the same within two years from the end of the relevant assessment year, provided the assessment had not been completed. This gave the assessee a time of three years or more for filing the return of income after he had closed his accounts and was an impediment in early completion of assessments. The Amending Act, 1987 has, therefore, substituted a new sub-section (4) whereby the time limit is reduced to one year from the end of the relevant assessment year. Reference to sub-section (2) has also been omitted. It has, however, been provided that in respect of the assessment year 1988-89 or any earlier assessment year, the return can still be filed within two years from the end of the relevant assessment year.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.7 Under the old provisions of sub-section (5), an assessee, having furnished a return under sub-section (1) or (2), could file a revised return at any time before the assessment was made. This could be up to two years from the end of the relevant assessment year. The Amending Act, 1987 has substituted a new sub-section (5) whereby this time limit for filing a revised return is also reduced to one year from the end of the relevant assessment year. Reference to sub-section (2) has also been omitted. It has also been provided that in respect of the assessment year 1988-89 or any earlier assessment year, the revised return can still be filed within two years from the end of the relevant assessment year.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.8 Returns by charitable or religious trust and institutions [section 139A(4)] - The old provisions of sub-section (4A) dealt with the filing of returns by charitable or religious trusts or institutions whose income was exempt under sections 11 and 12. Pursuant to the omission of sections 11 and 12 and substitution of those provisions by a new section 80F, the Amending Act, 1987 substituted a new sub-section (4A) in section 139 containing consequential amendments.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.9 However, the Amending Act, 1989 has again brought back the old sub-section (4A) of section 139 consequent upon the revival of the old sections 11 and 12 and the omission of new section 80F.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.10 Substitution of the provisions of sub-section (8) of section 139, relating to charge of interest for late filing or non-filing of returns, by the provisions for charge of mandatory interest under the new section 234A - Under the old provisions of sub-section (8) an assessee was liable to pay simple interest @ 15 per cent per annum on the amount of tax payable on the total income determined on regular assessment, as reduced by the advance tax paid or tax deducted at source, if any, for late filing or non-filing of the return of income. The Amending Act, 1987 has inserted a terminal clause in the said sub-section (8) to provide that the  provisions of this sub-section shall apply in respect of the assessment year 1988-89 or any earlier assessment year. For the assessment year 1989-90 and subsequent assessment years mandatory interest @ 2 per cent per month is to be charged for late filing or non-filing of return under the provisions of a new section 234A inserted by the Amending Act, 1987. [Refer paras 10.3 to 10.5 in these Explanatory Notes].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.11 Amendments of the provisions relating to permanent account numbers (section 139A) - The Amending Act, 1987 has made the following amendments in section 139A relating to permanent account numbers:�

  (i) Consequent upon the adoption of financial year as the uniform previous year for all assessees, reference in the section to �any accounting year� is substituted by a reference to �any previous year� and the definition of the term �accounting year� is omitted.

(ii) The Board is empowered to prescribe categories of documents pertaining to the business or profession of the persons to whom permanent account numbers have been allotted in which such numbers are to be quoted by them.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.12 Provisions relating to persons competent to sign the returns of income (section 140) - Under the old provisions of clause (a) of section 140, the return of income, in the case of an individual, had to be signed by the individual himself. Only two exceptions were provided to this general rule, namely:�

  (i) where the individual was outside India, the return could be signed either by the individual himself or by a person duly authorised by him in this behalf;

(ii) where the individual was mentally incapacitated from attending to his affairs, the return could be signed by his guardian or any other person competent to act on his behalf.

Apart from the above, there can be other contingencies where the individual may not be able to sign the return himself. For example, a person suffering from a serious ailment or physical disability may  also not be able to sign the return himself. Such contingencies have already been taken care of in section 15A of the Wealth-tax Act. In order to provide for such  contingencies and to bring the provisions of Income-tax Act at par with the provisions of the Wealth-tax Act, the Amending Act, 1987 has substituted a new clause (a) in section 140 of the Income-tax Act which, in addition to the two contingencies already provided for in the old provisions, provides for the remaining contingencies and lays down that where, for any other reason, it is not possible for the individual to sign the return, the same may be signed by any person duly authorised by such individual in this behalf. The said new clause (a) further provides that where a duly authorised person signs a return on behalf of an individual, either because the individual is out of India, or because for any other reason, it is not possible for the individual to sign the return, he should hold a valid power of attorney from the individual, which should be attached with the return.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.13 Under the old provisions of clause (c) of the section, the return of income in the case of a company, could be signed by the managing director, or where for any unavoidable reason, the managing director was not able to sign the return, it could be signed by any director of the company. This caused problems in the case of non-resident companies where all the directors were outside the country and also in the case of companies which were being wound up or whose management was taken over by the Government. The Amending Act, 1987 has, therefore, added two provisos to the said clause (c) of the section to provide that the return can also be signed and verified,�

  (i) in the case of a non-resident company, by a person holding valid power of attorney from such company, which shall be attached with the return;

(ii) where the company is being wound up, by the liquidator of the company; and

(iii) where the management of the company has been taken over by the Central or State Government, by the principal officer thereof.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.14 The old provisions of section 140 did not provide as to who will be competent to sign and verify the return in the case of a political party, although section 139(4B) did cast the responsibility for furnishing the return of income of a political party within the specified time limit on its Chief Executive Officer, if the income exceeded the maximum amount not chargeable to tax. To remove this lacuna, the Amending Act, 1987 has inserted a new clause (dd) in the section to provide that in the case of a political party referred to in section 139(4B), the Chief Executive Officer thereof shall be the person competent to sign and verify the return.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.15 Provisions relating to payment of self-assessment tax before filing the return (section 140A) - Under the old provisions of sub-section (1) of section 140A, the assessee was required to pay tax on the basis of the return, after taking into account taxes already paid at the time of filing the return. Such tax, known as the self-assessment tax, was to be paid before  filing the return and proof of payment thereof was to be attached with the return. The old provisions covered the limited aspect of paying, at the time of filing the return, the tax only and not the �interest� payable by the assessee for late filing of return or for default or delay in payment of advance tax.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.16 For delay in filing the return of income and for delay or default in payment of advance tax, mandatory interest is now payable under the provisions of new sections 234A to 234C inserted by the Amending Act, 1987. Further, under the new scheme of assessment also being introduced by the Amending Act, 1987 (refer para 5.2 of these Explanatory Notes), if the tax and interest due on the basis of returned income have been correctly paid, the return will be accepted as such and no further action on it will be necessary. For successful implementation of the new scheme of assessment, it is necessary that the assessees should also pay interest due under the provisions of the new sections 234A to 234C along with the self-assessment tax before filing the return of income. The Amending Act, 1987 has, therefore, amended sub-section (1) of section 140A to make it mandatory for a person to pay before furnishing the return, tax together with interest payable under any provisions of the Act for delay in furnishing the return or any default or delay in payment of advance tax. Proof of payment of such tax and interest is to be attached with the return. Further, an Explanation has been inserted in the said sub-section (1) to clarify that where the assessee pays only part of the amount due at the time of filing the return, such payment shall first be adjusted towards the interest payable, and balance, if any, shall be adjusted towards the tax payable.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.17 The old provisions of sub-section (3) of the section provided for levy of penalty for non-payment of self-assessment tax. Since the rate of mandatory interest for failure to pay the tax has now been increased, it is not necessary to retain this provision any more. The Amending Act,1987 has, accordingly, omitted the said sub-section (3).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.18 In order to vest the power of recovery of tax and interest due, under this section, on the basis of the return, the Amending Act, 1987 has inserted a new sub-section (3) in the section to provide that if any assessee has not paid self-assessment tax and interest in full before filing the return, he shall be deemed to be an assessee in default in respect of such tax and interest.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.19 Omission of section 141A relating to provisional assessment for refund - The Amending Act, 1987 has omitted section 141A dealing with completion of provisional assessment for the purposes of giving refund to the assessee on the basis of his return, as this provision has become redundant in view of the new scheme of assessment under which such refunds will be automatically allowed to the assessee under the provisions of the new section 143(1)(a). [Refer para 5.2 of these Explanatory Notes].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.20 Amendments of the provisions of section 142(1) relating to enquiry before assessment, to include power to call for a return - Under the old provisions of sub-section (1) of section 142, the Income-tax Officer, for the purposes of making an assessment, could require an assessee, who had made a return or to whom a notice under section 139(2) had been issued (whether the return had been made or not), to produce specific books of account, documents or information which he thought were relevant to make an assessment. However, the Assessing Officer could not initiate any enquiries by issue of a notice under section 142(1), if the assessee had defaulted in voluntarily filing a return under the provisions of section 139(1). Consequent upon the omission of sub-section (2) of section 139 and more emphasis on voluntary compliance under section 139(1), as explained earlier, the Amending  Act, 1987 has amended sub-section (1) of section 142 to omit reference to sub-section (2) of section 139 and to provide that a notice under the said sub-section (1) of section 142 can be issued even where the assessee has not filed the return of income voluntarily by the due date under section 139(1). The Amending Act, 1987 has further provided that where a return has not been filed voluntarily before the end of the relevant assessment year, the Assessing Officer can call for a return of income by issue of a notice under the said sub-section (1) of section 142. This provision thus enables the Assessing Officer to call for a return, and is a substitute for the provisions of section 139(2). However, a return can be called for under section 142(1) only after the relevant assessment year has ended without the assessee having filed the return of income.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

4.21 These amendments come into force with effect from the 1st April, 1989.

[Sections 42 to 47 of the Amending Act, 1987]

[Section 20 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Procedure for assessment - New scheme of assessment

5.1 The new scheme of assessment (new section 143) - With the number of income-tax assessees continuously increasing, there was an urgent need to reduce the Department�s work load by greater reliance on voluntary compliance by the assessees. The Amending Act, 1987 has, therefore, substituted a new section 143 in the Income-tax Act to introduce an entirely entirely new scheme of assessment after a return of income has been filed. The main features of the new scheme are :

  (i) The requirement of passing of assessment order in all cases, where returns of income are filed, has been dispensed with and the issue of an acknowledgement slip to the assessee will be the end of the matter, if he has correctly paid tax and interest, if any, due on the basis of the return.

(ii) If on the basis of the return any amount is found due from the assessee, it can be recovered, if any refund is found due to the assessee, it can be granted without passing an assessment order.

(iii) Assessment orders will be passed only in a very limited number of cases selected for a scrutiny.

The old and new provisions of section 143 are discussed in greater details in the following sub-paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.2 Requirement of passing an assessment order in cases dispensed with [sub-section (1) of section 143] - Under the old provisions of sub-section (1) of section 143, after a return of income had been filed, a regular assessment order had to be passed by the Assessing Officers even where the return was accepted without requiring the presence of the assessee or the production by him of any evidence in support of the return. However, sub-section (1) of the new section, substituted by the Amending Act, 1987 has done away with this requirement and it only provides for proper recovery of tax or interest due from the assessee or issue of refund due to the assessee on the basis of the return. Clause (a) of sub-section (1) of the new section provides that after a return has been filed under section 139 or in response to notice under section 142(1), the following action shall be taken:�

  (i) if any tax or interest is found due on the basis of the return, after adjustments of the prepaid taxes, an intimation shall be sent to the assessee specifying the amount so payable and such intimation shall be deemed to be the notice of demand; and

(ii) if any refund is due, it shall be granted to the assessee.

Thus, if the tax on the basis of the returned income and interest, if any, due under various provisions of the Act (as explained in para 4.16 of these Explanatory Notes) has been correctly paid so that  no sum is found payable by or refundable to the assessee, no further action on the return is necessary, unless, of course, the case is picked up for scrutiny.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.3 Adjustments be made to the income or loss declared in the return - A proviso to clause (a) of sub-section (1) of the new section enables the Department to make the following adjustment to the returned income or loss for the purposes of computing the tax or interest payable by or refundable to the assessee:�

  (i) rectification of any arithmetical errors in the return or in the accompanying accounts or documents;

(ii) allowance or disallowance of any loss carried forward, deduction, allowance or relief, which, on the basis of information available in such return or the accompanying accounts or documents, is prima facie admissible or inadmissible, as the case may be.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.4 The prima facie adjustments mentioned at (ii) above can be made only on the basis of information available in the return or the accompanying accounts or documents and not on the basis of the past records of the assessee. Some examples of such prima facie admissibles or inadmissibles in respect of which adjustments can be made to the returned income or loss are:�

  (i) While computing income under the head �Salaries�, standard deduction under section 16(i) is not claimed, or claimed at a figure which is less than or in excess of the permissible limit.

(ii) While computing  income under the head �Income from house property�, deduction for 1/6th for repairs or for a new unit under the proviso to section 23(1) is not claimed, or claimed at a figure which is less than or is in excess of the permissible amount.

(iii) While computing income under the head �Profits and gains of business or profession�, depreciation claimed at rates lower or higher than those provided for in the Income-tax Rules.

(iv) While computing capital gains, deduction of Rs. 10,000 under section 48(2) is not claimed or claimed less or in excess of this amount.

(v) Carried forward speculation loss set off against income from business or profession or against income under any other head.

(vi) Loss under any head, other than under the head �Profits and gains of business or profession�, carried forward and set off against the current income.

(vii)  Carried forward loss of business set off against income of the current year under other heads.

(viii) Old loss of more than eight assessment years set off against the current business income, if the information is available in the return or the accompanying documents.

(ix) Deduction under section 80C in respect of provident fund contributions or life insurance premia or N.S.C.VI or VII Issue not claimed, though the information is available in the documents accompanying the return, or claimed at a figure which is less than or is in excess of the permissible amount.

  (x) Deduction under section 80L not claimed, or claimed at a figure which is less than or is in excess of the permissible amount.

(xi) Deduction under section 80G not claimed, although allowable on the basis of the information available in the return or the accompanying documents, or claimed at a figure which is less than or is in excess of the permissible amount.

(xii)     Deduction under section 80M claimed at 60 per cent of gross dividend income instead of on net dividend income in violation of the provisions of section 80AA.

It may be mentioned that the above is not an exhaustive, but only an illustrative, list of prima facieadmissibles or inadmissibles for which adjustments can be made to the returned income or loss.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.5 Amendment made by the Amending Act, 1989 to provide for time limit for sending an intimation to the assessee under section 143(1)(a)(i) - No time limit was prescribed under the provisions of section 143(1)(a)(i), as introduced by the Amending Act, 1987 for sending an intimation to the assessee in respect of any tax or interest found due from him on the basis of the return. A number of representations were received from the taxpayers that the assessee would remain in suspense about the finality of their returns and the Assessing Officers might send an intimation for payment of a  sum by the assessee even after a considerable lapse of time, may be 10 years or more. The Amending Act, 1989 has, therefore, inserted another proviso in clause (a) of sub-section (1) of the section to provide that such an intimation shall not be sent after the expiry of two years from the end of assessment year in which the income was first assessable. The effect is that if the Assessing Officer fails to send an intimation to the assessee within the said period of two years, it will not be possible for him to recover the tax or interest due from the assessee on the basis of the return. However, if any assessee has understated his income or has claimed excessive loss, deduction, allowance or relief in the return, the Assessing Officer may reopen his case under the provisions of clause (b) of Explanation 2 to the new section 147 (refer para 7.3 of these Explanatory Notes).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.6 Issue of a revised intimation of refund to the assessee - Clause (b) of sub-section (1) of the new section provides for the issue of a revised intimation to the assessee for any tax or interest due from him or for any revised refund due to him, where as a result of any of the appellate, revisionary or settlement orders mentioned in the clause relating to any earlier assessment year and passed subsequent to the filing of the return referred to in clause (a), there is any variation in the carry forward loss, deduction, allowance or relief claimed in the said return. However, a revised intimation under this clause shall not be sent after the expiry of 4 years from the end of the financial year in which such appellate, revisionary or settlement order was passed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.7 Insertain of sub-section (1A) in section 143 by the Amending Act, 1989, to provide for charge  of additional tax where returned income is increased as a result of adjustment made under section 143(1)(a)- The new section 143, as substituted by the Amending Act, 1987, while dispensing with the necessity of passing assessment orders in all cases, did not contain any deterrent provision against filing of incorrect returns to show lesser tax liabilities. Consequently the new scheme of assessment was liable to be misused by unscrupulous taxpayers, who might return lesser income by making obvious mistakes or by claiming obviously incorrect deductions and taking a chance that if the same are deducted by the Department, they would have to pay the correct tax only. The Amending Act, 1989 has, therefore, inserted a new sub-section (1A) in the section to provide for the levy of 20% additional tax in such cases. Besides its deterrent effect, the purpose of this levy is also to persuade all the taxpayers to fill their returns of income carefully to avoid mistakes. It is, thus, a sort of negligence tax on the assessee and compensates the department for the effort involved in detecting the obvious mistakes committed by the taxpayers in their returns of incomes or loss. The provisions are discussed in greater detail in the following sub-paragraphs.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.8 The new sub-section (1A) provides that where the total income, as a result of adjustments made under the proviso to section 143(1)(a), exceeds the total income declared in the return by any amount, an additional tax of 20% of the tax payable on such excess amount shall be levied. It also provides for the increase or decrease of the amount of additional tax consequent upon the increase or decrease in the amount on which additional income-tax is payable by reason of an order of rectification under section 154, or appellate or revisionary orders mentioned in that sub-section.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.9 An Explanation in the said sub-section (1A) provides that the additional tax of 20% will be levied on,�

  (i) in a case where the amount of the aforesaid adjustments exceeds the total income, the tax that would have been chargeable, had the amount of adjustments been the total income;

(ii) in any other case, the difference between the tax on the total income and tax that would have been chargeable had such total income been reduced by the amount of adjustments.

The provisions of clause (i) of the Explanation apply in the case of loss returns only. These provisions are on the same lines as the provisions for the levy of penalty under section 271(1)(c) for concealment of income in the case of loss returns, as contained in clause (a) of Explanation 4 to section 271(1).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.10 Commencement of proceedings for scrutiny and completion of a scrutiny assessment [sub-sections (2) and (3) of section 143] - Under the old provisions of sub-section (2) of section 143, a notice could be served upon the assessee to produce evidence in support of his return under any of the following circumstances:�

(a) where an assessment had been made under section 143(1),�

  (i) if the assessee objected to such an assessment, or

(ii) if the Assessing Officer wanted to verify the correctness or completeness of the return; and

(b) where the Assessing Officer did not complete the assessment under section 143(1), but wanted to make an enquiry to verify the correctness and completeness of the return.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.11 Under the old provisions of sub-section (3) of section 143, the Assessing Officer, after considering the materials and evidence produced by the assessee and after making necessary enquiries, could proceed as under:�

  (i) where no assessment had been made earlier under sub-section (1), he could make an assessment of the total income or loss of the assessee;

(ii) where an assessment had been made earlier under sub-section (1), he could make a fresh assessment of the total income or loss of the assessee, and determine the sum payable by him or refundable to him on the basis of such assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.12 Since under the provisions of sub-section (1) of the new section 143, as assessment is not to be made now, the provisions of sub-sections (2) and (3) have also been recast and are entirely different from the old provisions. A notice under sub-section (2), which will be issued only in cases picked up for scrutiny, is now issued only to ensure that the assessee has not understated his income or has not computed excessive loss or has not underpaid the tax in any manner while furnishing his return of income. This means that under the new provisions, in an assessment order passed under section 143(3) in a scrutiny case, neither the income can be assessed at a figure lower than the returned income, nor loss can be assessed at a figure higher than the returned loss, nor a further refund can be given except what was due on the basis of the returned income, and which would have already been allowed under the provisions of section 143(1)(a)(ii).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.13 A proviso to sub-section (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return is furnished or within six months from the end of the month in which the return is furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice under section 143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started  in respect of that return.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.14 The provisions of sub-section (3) of the new section have also been simplified to provide for passing an assessment order under this sub-section only under one circumstance, that is, where a notice under sub-section (2) has been issued to the assessee, whose case is picked up for scrutiny. As already explained, since in an assessment completed under the new sub-section (3), neither the returned income can be assessed at a lower figure, nor can a further refund be granted, the words �or refundable to the assessee�, which were there in old sub-section (3), do not find place in the new sub-section.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.15 Whether in a case picked up for scrutiny an intimation or refund under section 143(1)(a) should be issued before completion of assessment under section 143(3) - A question has been raised as to whether in a case selected for scrutiny an intimation under section  143(1)(a)(i) for any tax or interest found due from the assessee, or a refund under section 143(1)(a)(ii) found due to the assessee on the basis of the return of income or loss should be issued immediately and before completion of a regular assessment under section 143(3). In this connection, it may be pointed out that the scheme of the new section 143 is such that action under section 143(1)(a) must be taken soon after the filing of the return to avoide delay in:�

  (i) collection of demand which is clearly due on the basis of return, or

(ii) issue of refund due on the basis of return, failing which the Government would have to pay interest @ 1.5 per cent per month under the provisions of new section 244A (refer paras 11.1 to 11.9 in these Explanatory Notes).

Once the case is picked up for scrutiny, the Department would normally get more than two years for completion of regular assessment under section 143(3). Therefore, collection of demand due or issue of refund due on the basis of return need not wait for such a long period. It may further be pointed out that no refund can now be granted on completion of an assessment under the provisions of section 143(3). For this reason also, action under section 143(1)(a)(ii) for issue of a refund on the basis of a return of income or loss must be completed before an assessment order under section 143(3) is passed in that case, as otherwise the provisions of sections 143(1)(a)(ii) and 143(3) would get mixed up and may create confusion and uncertainty.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.16 From the above discussion it follows that even in cases selected for scrutiny it is desirable that action under section 143(1)(a) for issue of an intimation for any sum due from the assessee or for issue of a  refund due to the assessee on the basis of return must be completed soon after the filing of the return and in any case before completion of assessment under section 143(3). In fact, it will be preferable if action under section 143(1)(a) is completed even before the issue of a notice under section 143(2) in such cases.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.17 Whether any appeal is provided against an adjustment made under the proviso to section 143(1)(a) or the levy of additional income-tax under section 143(1A) - A direct appeal has not been provided against adjustments made under the proviso to section 143(1)(a) and the consequential  charge of additional income-tax under section 143(1A), because the adjustments are to be made only in respect of arithemetical errors and prima facie admissibles or inadmissibles. Any action of the Assessing Officer in contravention of these provisions will be clearly a mistake. Therefore, section 154 relating to rectification of mistakes has been amended to bring an intimation/refund issued under section 143(1) within the purview of that section (refer para 9.1 of these Explanatory Notes). Therefore, if an assessee is aggrieved by an adjustment made to the returned income/loss and also the consequential charge of additional income-tax he can move an application under section 154 before the Assessing Officer for rectification of the mistake. If the said application is rejected, the assessee can file an appeal or revision against such order or rejection. Thus, in effect, an adjustment made under the proviso to section 143(1)(a) or additional income-tax charged under section 143(1A) are appealable, though not directly but through the provisions of section 154.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

5.18 These amendments  come into force with effect from the Ist April, 1989. It has been clarified by the issue of an Income-tax (Removal of Difficulties) Order, 1989, vide No. GSR 376(E) dated 23-3-1989 (refer paras 11.2 and 11.3 of part I of these Explanatory Notes) that the provisions of section 143, as they stood prior to the commencement of the Amending Act, 1987, shall apply in respect of the assessment year 1988-89 and earlier assessment years.  It follows,  therefore, that the provisions of the new section 143, as substituted by the Amending Act, 1987, would apply to the assessment year 1989-90 and subsequent assessment years.

[Section 48 of the Amending Act, 1987]

[Section 21 of the Amending Act, 1989]

JUDICIAL ANALYSIS

EXPLAINED IN - In Indo-Gulf Fertilisers & C.C. Ltd. v. Union of India [1992] 195 ITR 485 (All.) the above circular was commented upon with the following observations :

�... Circular No. 549, dated October 31, 1989, relied upon by the opposite parties is not correct when it says that clause (i) of the aforesaid Explanation applies in the cases of loss returns only.  It may be true that it may apply in a case where a loss return has been filed but on adjustment, the losses have disappeared and there is positive income which can be taxed.  But to apply it in cases where after adjustment, the return showing losses still shows losses, would not be correct.� (p. 493)

EXPLAINED IN - In S.R.F. Charitable Trust v. Union of India [1992] 193 ITR 95 (Delhi) the above circular was explained with the following observations :

�The aforesaid example contained in the circular clearly show that, for want of proof, no disallowance or adjustment can be made. It is only when a disallowance is evident from the facts on record that an adjustment can be made.

As already noted, in the present case, the adjustments were made for the reason that, in support of the claim, the petitioner had not furnished the proof. The stage of furnishing of the proof is reached as and when proof is demanded by the Income-tax Officer on a notice under section 143(2) being issued.  If no proof in support of the claim was available with the Income-tax Officer, he could have issued a notice under section 143(2) but he could not have unilaterally made this disallowance by seeking to invoke the provisions of the first proviso to section 143(1) because the said provisions were not applicable in the present case.� (p. 100)

EXPLAINED IN - In JCT Ltd. v. Hari Kishan [1992] 196 ITR 55 (Bom.) it was observed that illustrative list in Circular No. 549, clearly points out that only adjustments which are, on the basis of the return and documents accompanying it, allowable or disallowable, can be adjusted.

In Amber Electrical Conductors (P.) Ltd. v. Dy. CIT [1992] 43 ITD 313 (Mad.-Trib.) it was observed that in paragraph 5.4 of Circular No. 549 dated October, 31, 1989, the CBDT has given some examples of suchprima facie admissibles or inadmissibles in respect of which adjustments can be made to the returned income or loss.  It will be ex facie clear from the list of examples contained in the said paragraph thatprima facie adjustments are contemplated only in respect of what, in essence, are mistakes apparent from record.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Procedure for assessment : Miscellaneous provisions

6.1 Provisions relating to best judgment (ex parte) assessment (section 144) - Under the old provisions of section 144, a best judgment assessment could be completed if the assessee failed to furnish the return of income in response to notice under section 139(2) or failed to comply with notices under section 142(1) or 143(2) or with direction issued under section 142(2A). It was not necessary to give a specific opportunity to the assessee under this section before completing the assessment ex parte. Consequent to the deletion of sub-section (2) of section 139 and the substitution of a new section 143, the Amending Act, 1987 has made the following amendments in section 144:�

  (i) A best judgment assessment can now be completed  on assessee�s failure to file a return of income under sub-section (1) of section 139.

(ii) A best judgment assessment under this section can now be made only after giving the assessee an opportunity of being heard.

(iii) Two provisos have been inserted in the section to provide that such opportunity shall be given to the assessee calling upon him to show cause why the assessment should not be completed to the best of judgment. It is further provided that such opportunity shall not be necessary where a notice under section 142(1) has already been issued to the assessee.

(iv) The words �or refundable to the assessee�, which occurred in the old section 144, have been deleted, so that a refund cannot now be granted under this section. This amendment is on the same limes as in the new section 143(3).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

6.2 Consequential amendment to the provisions relating to power of Deputy Commissioner to issue directions (section 144A) - Sub-section (2) of the section 144A, which provided that the provisions of the said section shall be in addition to, and not in derogation of, the provisions contained in sub-section (3) of section 119, had become redundant as a result of the omission of the said sub-section (3) of section 119 by the Amending Act, 1987. Consequently, the said sub-section (2) of section 144A has also been omitted by the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

6.3 The Amending Act, 1989 has made amendment of a consequential nature in the Explanation to this section pursuant to the omission of sub-section (2) by the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

6.4 Omission of sections 144B and 146 - The Amending Act, 1987 has omitted the following sections of the Income-tax Act:�

  (i) Section 144B relating to reference to the Deputy Commissioner in certain cases.

(ii) Section 146 relating to re-opening of best judgment assessment by the Assessing Officer, on an application made by the assessee.

The omissions have been made because the provisions of both these sections had become redundant on account of their withdrawal, with effect from 1-10-1984, by the Taxation Laws (Amendment) Act, 1984.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

6.5 Provisions relating to method of accounting to the employed by the assessee (section 145) - Sub-section (1) of section 145 provides that income chargeable under the heads �Profits and gains on business or profession� or �Income from other sources� shall be computed in accordance with the method of accounting regularly employed by the assessee. Since any income by way of interest on securities is now chargeable to tax under any of the above two heads, the Amending Act, 1987 has inserted a second proviso to the said sub-section (1) to provide that where no method of accounting is regularly employed by the assessee, any income by way of interest on securities shall be chargeable to tax as the income of the previous year in which it is due to the assessee, i.e., it will be taxed on accrual basis.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

6.6 These amendments come into force with effect from the 1st April, 1989.

[Sections 49 to 53 of the Amending Act, 1987]

[Section 22 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Income escaping assessment

7.1 Simplification of the provisions relating to assessment or reassessment of income escaping assessment (section 147) - Under the old provisions of section 147 of the Income-tax Act, separate clauses (a) and (b) laid down the circumstances under which income escaping assessment for the past assessment years could be assessed or reassessed, as follows:�

  (i) Clause (a) empowered the Income-tax Officer to assess or re-assess the income escaping assessment, if he had reason to believe that income had escaped assessment on account of omission or failure on the part of the assessee to file a return of income for an assessment year or to disclose fully and truly all material facts necessary for assessment for that year.

(ii) Clause (b) empowered the Income-tax Officer to reopen an assessment, notwithstanding the fact that there had been no omission or failure, as mentioned in clause (a), on the part of the assessee if the Income-tax Officer, on the basis of information in his possession, had reason to believe that income had escaped assessment for the relevant assessment year.

Since under the new scheme of assessment (refer para 5.1 of  these Explanatory Notes), introduced by the Amending Act, 1987, returns filed will now be accepted as such and passing of assessment orders will not be necessary, it follows that in majority of cases there would not be any application of mind by the Assessing Officer after the returns are filed, unless the case is picked up for scrutiny and a regular assessment order is passed under section 143(3). The Amending Act, 1987 has, therefore, rationalised the provisions of section 147 and other connected sections to simplify the procedure for bringing to tax the income which escaptes assessment, espacially in non-scrutiny cases. Thus, the Amending Act, 1987 has substituted a new section 147, which contains simplified provisions as follow:�

  (i) Separate provision contained in clauses (a) and (b) of the old section have been merged into a single new section, which provides that if  the Assessing Officer is of the opinion that income chargeable to tax for any assessment year has escaped assessment, he can assess or reassess, the same after recording in writing the reasons for doing so.

(ii) The requirements in the old provisions that the Income-tax Officer should have �reason to believe� or �information� in possession before taking action to assess or reassess the income escaping assessment, have been dispensed with.

(iii) The existing legal interpretation that once an assessment has been reopened, any other income that has escaped assessment and comes to the notice of the Assessing Officer subsequently during the course of proceedings under this section can also be included in the assessment, has been incorporated in the new section  itself.

(iv)  A proviso to the new section provides that an assessment, which has been completed under section 143(3) or 147, i.e., a scrutiny assessment can be reopened after the expiry of 4 years from the end of the relevant assessment year only if income has escaped assessment due to the failure on the part of the assessee to file a return of income or to disclose fully and truly all material facts necessary for his assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.2 Amendment made by the Amending Act, 1989 to reintroduce the expression �reason to believe� in section 147 - A number of representations were received against the omission of the words �reason to believe� from section 147 and their substitution by the �opinion� of the Assessing Officer. It was pointed out that the meaning of the expression, �reason to believe� had been explained in a number of court rulings in the past and was well settled and its omission from section 147 would give arbitrary powers to the Assessing Officer to reopen past assessments on mere change of opinion. To allay these fears, the Amending Act, 1989 has again amended section 147 to reintroduce the expression �has reason to believe� in place of the words �for reasons to be recorded by him in writing; is of the opinion�. Other provisions of the new section 147, however, remain the same.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.3 Deemed cases of income escaping assessment (Explanation 1 to section 147) - Under the old provisions of Explanation 1 to section 147, income chargeable to tax was deemed  to have escaped assessment if it had been underassessed or assessed at too low a rate or if any excessive relief or loss or depreciation allowance had been allowed. The new provisions in this respect,  as contained inExplanation 2  to new section 147, are more elaborate and cover those cases where assessments have been completed (called as scrutiny cases) as well as those cases where no assessments have been completed (called as non-scrutiny cases). Thus, the new Explanation 2 to the section clarifies that the following shall be deemed to be cases of income escaping assessment:�

  (i) Where no return of income has been furnished by the assessee, although the total income is above the taxable limit.

(ii) Where a return of income has been furnished, but no assessment has been made (i.e., in a  non-scrutiny case) - if the assessee is found to have understated his income or claimed excessive loss, deduction, allowance or relief in the return.

(iii) Where an assessment has been made (i.e., in a scrutiny case) - if income chargeable to tax has been underassessed or assessed at too low a rate or if any excessive relief or loss or depreciation allowance or any other allowance under this Act has been allowed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.4 Amendment of provisions relating to issue of notice where income has escaped assessment  (section 148) - The old provisions of section 148 of the Income-tax act provided that a notice issued under this section shall tantamount to a notice issued under section 139(2). It was also provided in sub-section (2) of the said section 148 that before issuing a notice under this section, the Income-tax Officer will record the reasons for doing so. The Amending Act, 1987 has substituted a new section 148. The main features of the new section are:�

  (i) Consequent upon the omission of sub-section (2) of section 139, reference to the same has been removed and the new section 148 has been made self-contained.

(ii) Sub-section (2) of this section has been omitted, as the requirement of recording reasons in writing has been incorporated in the new section 147 itself.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.5 Consequent upon further amendment of section 147 by the Amending Act, 1989, whereby the requirement of recording reasons in writing has been omitted from that section (refer para 7.2 ante), the Amending Act, 1989 has again amended section 148 to reinsert sub-section (2). Thus the requirement of recording reasons in writing before issuing a notice under section 148 continues to remain in the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.6 Provisions relating to time limits for issue of notice under section 148 [sub-section (1) of section 149]- Under the old provisions of sub-section (1) of section 149, time limits for opening or re-opening of past cases were laid down depending upon whether the case was covered under clause (a) or clause b) of the old section 147. Thus, no notice under section 148 could be issued in  a case falling under clause (b) after the expiry of 4 years and in a case falling under clause (a) after the expiry of 8 years from the end of the relevant assessment year. However, in a case falling under clause (a) if the income which had escaped assessment amounted to Rs. 50,000 or more in that year, the case could be re-opened upto 16 years.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.7 In view of the new procedure for assessment (refer para 5.1 of these Explanatory Notes) whereby majority of cases will be non-scrutiny cases, while only a very small percentage will be scrutiny cases [i.e., where an assessment order will be passed under section 143(3) or 147], the Amending Act, 1987 has substituted a new sub-section (1) in section 149, which contains an entirely different basis for the time limits. The time limits now depend upon whether the case is a scrutiny case or a non-scrutiny case and also the amount of income which has escaped assessment. The income limits for opening or re-opening a non-scrutiny case are lower than those for re-opening a  scrutiny case. The new provisions of section 149(1) are explained in a chart given in para 7.11 post.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.8 Time limits not to apply to give effect to an order of a court in any proceedings [sub-section (1) of section 150] - Under the old provisions of sub-section (1) of section 150, a notice under section 148 could be issued at any time, notwithstanding the time limits prescribed in section 149, if an assessment, re-assessment or re-computation was to be made in pursuance of any finding or direction contained in an order of appeal, reference or revision passed under the Income-tax Act. However,  there can  be proceedings other than those under the Income-tax Act, which can have a bearing in quantifying the past income of the assessee, which may have escaped assessment. For example, a writ proceeding challenging the constitutional validity of any other Act may have a bearing on the assessment  of income. To plug this loophole, the Amending Act, 1987 has amended the said sub-section (1) to empower the Assessing Officer  to  issue a notice under section 148 at any time to give effect to any finding or direction contained in an order passed by a court in any proceeding under any other law.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.9 Provisions relating to sanction of superior authorities for issue of notice under section 148 (section 151) - Under the old provisions of section 151, the sanctioning authorities for opening or re-opening of past cases were prescribed depending upon the period after which action was being taken. Thus, if notice under section 148 was to be issued after the expiry of four years from the end of the assessment year, sanction of the Commissioner was necessary, while after the expiry of eight years from the end of the assessment year, the sanction of the Board was necessary.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.10 For the same reasons as discussed in para 7.7 ante, the Amending Act, 1987 has substituted a new section 151, which contains substantially changed provisions. The issuing or sanctioning authorities will now depend upon whether the case is a scrutiny case [i.e., where an assessment order has been passed under section 143(3) or section 147] or non-scrutiny case, and also the period after which the case is being opened or re-opened. Thus, a scrutiny assessment will not be re-opened by an Assessing Officer of the rank below the rank of an Assistant Commissioner. After the expiry of 4 years from the end of the relevant assessment year, a scrutiny assessment can be re-opened only with the approval of the Chief Commissioner or Commissioner. A non-scrutiny case can be opened or re-opened by any Assessing Officer and after the expiry of 4 years from the end of the relevant assessment year it can be opened or re-opened with the approval of the Deputy Commissioner. However, where the Assessing Officer is the Deputy Commissioner himself, no sanction of the higher authority will be necessary for opening or re-opening a non-scrutiny case.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.11 The new provisions of section 149(1) regarding time limits and section 151 regarding issuing and sanctioning authorities for the issue of a notice under section 148 are explained in the following chart:�

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.12 Consequential amendment to section  152(2) - The Amending Act, 1987 had made an amendment of consequential nature in sub-section (2) of section 152, containing a provision for dropping a re-opened assessment under certain circumstances, pursuant to the merger of clauses (a) and (b) of the old section 147 into a single new section 147.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.13 Amendments to have retrospective effect - These amendments come into force with effect from the 1st day of April, 1989. However, it may be clarified that since the provisions of sections 147 to 152 lay down procedural law, these have retrospective effect, unless the amending statute provides otherwise. Therefore, the amendments made to these sections by the Amending Acts, 1987 and 1989, discussed in the preceding paragraphs, which came into force with effect from 1-4-1989, will be retrospective in  the sense that these will apply to all matters which were pending on 1-4-1989 and had not become closed or dead on this date.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

7.14 Thus, from 1-4-1989 onwards, any action for opening or re-opening an assessment for the assessment year 1988-89 and earlier assessment years will have to be taken in accordance with the amended provisions. The following examples will clarify the position:

  (i) No notice under section 148 can now be issued for the assessment years 1973-74 to 1978-79 even if the escaped income is Rs. 50,000 or more in each year, although under the old provisions this could have been done with Board�s approval.

(ii) Notice under section 148 can now be issued for any of the assessment years 1979-80 to 1981-82 if the following conditions are fulfilled:�

(a) In a  scrutiny case [i.e, where an assessment order had been passed under section 143(3) or 147], if the escaped income is Rs. 1 lakh or more in each year and approval of the Chief Commissioner or Commissioner has been obtained.

(b) In a non-scrutiny case, if the escaped income is Rs. 50,000 or more in each year, and approval of the Deputy Commissioner has been obtained.

       (Under the old provisions, there was no distinction between a scrutiny and a non-scrutiny case. Action could have been taken in respect of both types of cases for the assessment year 1981-82 with the approval of the Chief Commissioner or Commissioner, whatever be the amount of escaped income, while for the assessment years 1979-80 and 1980-81 action could have been taken with Board�s approval if the escaped income was Rs. 50,000 or more in each year. These old provisions, however, have no application now from 1-4-1989 onwards).

(iii) Notice under section 148 can now be issued for any of the assessment years 1982-83 to 1984-85 if the following conditions are fulfilled:�

(a) in a scrutiny case, if the escaped income is Rs. 50,000 or more in each year and approval of the Chief Commissioner or Commissioner has been obtained.

(b) In a non-scrutiny case, if the escaped income is Rs. 25,000 or more in each year and approval of the Deputy Commissioner has been obtained.

       (Under the old provisions, action could have been taken for these assessment years, in respect of both types of cases, with the approval of the Chief Commissioner or Commissioner, whatever be the amount of escaped income. These old provisions, however, have no application now from 1-4-1989 onwards).

(iv) Notice under section 148 can now be issued for any of the assessment years 1985-86 to 1988-89, whatever be the amount of income which has escaped assessment, if the  Assessing Officer has reason to believe that any income chargeable to tax has excaped assessment.

       (Under the old provisions action could have been taken for these assessment years, if the circumstances mentioned in clause (a) or (b) of the old section 147 were satisfied. These old provisions, however, have no application now from 1-4-1989 onwards).

(v) A scrutiny assessment for any assessment year cannot be re-opened now by an  Assessing Officer below the rank of an Assistant Commissioner. Under the old provisions, there was no such restriction.

[Sections 54 to 58 of the Amending Act, 1987]

[Sections 23 and 24 of the Amending Act, 1989]

JUDICIAL ANALYSIS

EXPLAINED  IN - Paras 7.1 to 7.14 were held as �not con�trary to law�, in Chandi Ram v. ITO [1996] 87 Taxman 418 (Raj.). The Court observed :

�19. It is an established law that no one has vested right in procedural law and whenever a change is made with regard to procedure, it is retrospective in nature. In a matter of re-assessment proceedings under the Income-tax Act, the change has been brought with regard to circumstances and limitation as well. If the limitation has already expired, then the amended law would not revive the matters where the limitation is already expired, by taking into consideration the amended provisions of law on the ground that the limitation is extended. The provisions of Amended Act, therefore, would be applicable only in those cases where the limitation under the old law has not expired. So far as the question as to whether the phraseology used in the repealed section and in the amended section is concerned, I am of the view that there was no vested right in an assessee not to pay the correct tax. The provisions of assessment are meant for determi�nation of the correct liability of tax in accordance with law which should be on the basis of correct income and if there is any escapement, then the ITO has power to reopen the matter. The repealed section refers to the �information� on the basis of which the re-assessment proceedings could have been initiated. The information with regard to correct state of law by way of judgment of the Apex Court is also an information on the basis of which the action could have been taken under the repealed sec�tion. Now, the ITO can re-assess for any reason; therefore, the amended section cannot be considered to be effecting any right of the assessee. The circular which has been issued by the CBDT, though is having no binding effect on the Court, but the view which has been taken cannot be considered to be contrary to law...� (p. 427)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Time limit for completion  of assessments and reassessments

8.1 Time limit for completion of assessment under section 143(3)  or section 144 [Sub-section (1) of section 153] - Under the old provisions of sub-section (1) of section 153 of the Income-tax Act, various time limits were laid down for completion of an assessment under section 143(3) or under section 144. The old sub-section (1) consisted of four clauses (a) to (d) and clause (a) consisted of three sub-clauses (i) to (iii). The general time limit for completion of an assessment, as laid down in sub-clause (iii) of clause (a), was two years from the end of assessment year in which the income was first assessable.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.2 The Amending Act, 1987 has substituted a new sub-section (1), in section 153. The provisions of all the clauses and sub-clauses of the old sub-section (1), except the provisions of sub-clause (iii) of clause (a), have been omitted, because either these provisions have become redundant or they were imprectical and were not being used in practice. Therefore, the new sub-section (1) of section 153, substituted by the Amending Act, 1987, is much shorter and provides that no order of assessment under section 143 or section 144 shall be made after the expiry of two years from the end of the assessment year in which the income was first assessable.

Note: Section 20 of the Finance Act, 1989 has further amended the said sub-section (1) of section 153 to provide for tansitory provisions, whereby an exception is made in the case of a return or a revised return filed under sub-section (4) or (5) of section 139 relating to the assessment year 1988-89 or any earlier assessment year. In such a case, assessment can be completed before the expiry of one year from the end of the financial year in which the said return or revised return is filed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.3 Time limit for completion of assessment, reassessment or recomputation under section 147 [sub-section (2) of section 153] - Under the old provisions of sub-section (2) of section 153, different time limits were laid down for completion of assessment, reassessment or recomputation under section 147 depending upon whether the case fell under clause (a) or clause (b) of the old section 147. Normally the time limit, in a case falling in clause (a), was four years from the end of the assessment year in which the notice under section 148 was served and in a case falling in clause (b), the same was four years from the end of the assessment year in which the income was first assessable.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.4 Consequent upon the merger of clauses (a) and (b) into a single new section 147, the Amending Act, 1987 has substituted a new sub-section (2) in section 153, which provides a uniform time limit for completion of assessment, reassessment, etc, under section 147. The limit is two years from the end of the financial year in which notice under section 148 was served. Thus, the time allowed for completion of all assessments under section 147 has now been reduced to 2 years to facilitate  quicker assessments.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.5 As a transitory measure, an exception has been made in cases where notice under section 148 was served on or before 31-3-1987. In such cases, orders of assessment, reassessment or recomputation can be made up to 31-3-1990. This would help to tide over the difficulties during the transitional period, while switching over from the earlier 4 years limit to the new 2 years limit.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.6 Consequential amendment in Explanation 1 to section 153 - The Amending Act, 1987 has amendedExplanation 1 to section 153 by omitting clause (iv) of the said Explanation, which provided extended time limit in  a case referred to the Inspecting Assistant Commissioner under section 144B. This is consequent to the deletion of section 144B itself.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

8.7 These amendments come into force with effect from the 1st April, 1989. [Section 59 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Rectification of mistakes and other amendments of orders

9.1 Rectification of mistake in an intimation or a refund issued under section 143(1) [sub-section (1) of section 154] - Under the old provisions  of sub-section  (1) of section 154 of the Income-tax Act, an order passed by an income-tax authority under the provisions of the Act could be amended to rectify a mistake apparent from the record. Since an intimation for any tax or interest found due from the assessee or refund due to the assessee on the basis of the return of income issued under the provisions of new section 143(1) are not orders under the Act, any apparent mistake therein could not have been rectified under the old provisions of section 154(1). The Amending Act, 1987 has, therefore, substituted a new sub-section (1) in section 154 to extend the scope of the section by empowering an income-tax authority to amend any intimation sent by it or to reduce or enhance the amount of any refund granted by it under section 143(1) in order to rectify any apparent mistake therein.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

9.2 Omission of various sub-sections of section 155 relating to other amendments of orders - Section 155 of the Income-tax Act deals with various types of amendments that can be carried out in the orders passed under the Act. The Amending Act, 1987 has discontinued or omitted the provisions of a number of sub-sections of this section. These sub-sections, along with reasons for their discontinuace or omission, are indicated below:

*(a)     Sub-section (1), which deals with rectification of a partner�s share in the income of the firm, as its provisions would have become redundant consequent upon the new scheme of assessment of firms and partners introduced by the Amending Act, 1987.

(b) Sub-section (3), which deals with recomputation of income consequent to determination of tax liability under the excess profits tax or business profits tax, as its provisions have become redundant following the discontinuance of the levy of these taxes long back.

  (c) Sub-section (13), which deals with amendment of an assessment order by allowing the provision made for gratuity, which was deposited in an approved fund subsequent to the passing of an assessment order, as its provisions have become redundant after 31-3-1981.

(d) The following sub-sections have been omitted with effect from 1-4-1992:

*(i) Sub-section (5B), which deals with withdrawal of deduction for expenditure on scientific research originally allowed under sub-section (2B) of section 35, as its provisions would become redundant in view of the omission of section 35, itself by the Amending Act, 1987.

(ii) Sub-section (6), which deals with allowability of a bad debt in a year earlier than the year of write off, as its provisions would become redundant in view of the amendment of section 36 by the Amending Act, 1987, allowing the bad debt in the year of write off.

(iii) Sub-sections (7A), (8A), (9A), (10(b) and (10B), as these provisions would become redundant in view of the amendments to the provisions of sections 48, 54, 54B, 54D & 54E relating to capital gains by the Finance Act, 1987.

(iv) Sub-sections (8), (9), (10)(a) and (10C), as these provisions would become redundant in view of the new scheme of investment of capital gains introduced by the Finance Act, 1987.

*Note: Since the new scheme of assessment of firms and partners has been withdrawn and also section 35 has been restored by the Amending Act, 1989, the provisions of sub-sections (1) and (5B) of section 155 have also been restored by the Amending Act, 1989.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

9.3 These amendments [except amendments indicated at (d) in para 9.2 above, which would come into force with effect from 1-4-1992] come force with effect from 1-4-1989.

[Sections  60 and 61 of the Amending Act, 1987]

[Clause (i) of section 95 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Payment of mandatory interest to replace various interests and penalties

10.1 The old provisions in the Income-tax Act, which gave the assessing authorities discretionary powers to charge interest and also to levy penalties for the same default, were found to be rather complicated. These were contained in the following sections of the Act:�

  (i) Section  139(8) relating to levy of interest for late filing or non-filing of return of income.

(ii) Section  215 relating to levy of interest for underpayment of advance tax.

(iii) Section  216 relating to levy of interest for deferment of instalments of advance tax.

(iv) Section  217 relating to levy of interest for non-payment of advance tax.

(v) Section 271 (1)(a) relating to levy of penalty for failure to file the return of income or to file it in time.

(vi) Section 273 relating to levy of penalty for failure to file the statement/estimate or for filing an untrue statement/estimate of advance tax payable.

(vii)     Section 140A(3) relating to levy of penalty for failure to pay tax on self-assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.2 With a view to simplify the aforesaid provisions and also to remove the discretion of the assessing authorities, which had led to litigation and consequent delay in realisation of dues, the Amending Act, 1987 has substituted the above provisions by a simple scheme of payment of mandatory interest for defaults mentioned therein. The provisions relating the charge of mandatory interest are contained in the new sections 234A, 234B and 234C inserted by the Amending Act, 1987. The mandatory interest chargeable under these sections are not appealable. At the time filing the return of income, such mandatory interest, if payable, is to be calculated on the basis of the returned income and paid along with tax on self-assessment under section 140A.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.3  Charge of mandatory interest for non-filing or late filing of the return of income (new section 234A) - The provisions of the new section 234A inserted by the Amending Act, 1987, which have replaced the old provisions of sections 139(8), 140A(3) and 271(1)(a), are as follows:�

  (i) Sub-section (1) provides that where a return of income is furnished after the due date or is not furnished, the assessee shall pay simple interest @ 2% for every month or part of a month comprised in the period of default on the amount of tax on total income determined on regular assessment (as reduced by any advance tax paid or tax deducted at source).

It has been clarified that,�

       1. the due date for filing of a return of income is the date specified in section 139(1), as applicable in the case of the assessee;

       2. for the purposes of computing interest under this this section, additional income-tax payable under the new section 158B shall not be taken into consideration;

       3. for the purposes of this section an assessment made for the first time under section 147 shall be regarded as a regular assessment.

(ii) Sub-section (2) provides that any interest chargeable under this section, which has already been paid by the assessee under section 140A, shall be adjusted against interest determined to be payable on regular assessment.

(iii) Sub-section (3) provides for charge and mode of computation of interest where during the course of reassessment proceedings [after an assessment has been completed under section 143(3) or 144 or 147] the return of income is either filed late or not filed in response to a notice under section 148.

(iv) Sub-section (4) provides for automatic revision of the amount of interest where the amount of tax is varied as a result of an order of rectification, appeal, revision or settlement mentioned in the sub-section.

(v) Sub-section (5) provides that the provisions of this section shall apply to the assessment year 1989-90 and subsequent assessment years. [Refer Examples III and IV in para 10.13].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.4 Amendments made in section 234A by the Amending Act, 1989 - The new section 234A inserted by the Amending Act, 1987 provided for calculation of interest under that section only on completion of regular assessment. It did not provide for calculation of interest under the following circumstances :

  (i) Where interest is to be calculated and charged under provisions of the new section 143(1) without completing a regular assessment.

(ii) Where the assessee has to calculate the interest for paying self-assessment tax and interest under section140A at the time of filing his return.

The Amending Act, 1989 has, therefore, amended sub-section(1) of this section to provide for calculation and charging of interest on the basis of total income determined under the provisions of the new section143(1). Consequential amendments have also been made in sub-section (3) of the section also. The Amending inserted an Explanation  4 in sub-section (1) to provide for calculation  and payment of by the assessee under section 140A at the time of filing his return. [Refer Examples I to IV in para 10.13].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.5 The Amending Act, 1989 has also carried out amendments in this section to delete references to section 158B relating to charge of additional income tax, consequent upon the deletion of that section, and replace it, wherever necessary by reference to the new sub-section (1A) of section 143 under which additional income-tax of a different nature is now leviable under certain circumstances. The Amending Act, 1989 has further included reference to �tax collected at source� in the section consequent upon the insertion of the provisions of section 206C by the Finance Act, 1988.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.6 Charge of mandatory interest of non-payment or underpayment of advance tax (new section 234B) - The provisions of the new section 234B inserted by the Amending Act, 1987, which have replaced the old provisions of sections 215 and 217, are as under:

  (i) Sub-section (1) provides that where an assessee, who is liable to pay advance tax in a financial year, fails to pay such tax or, where the advance tax paid by him is less than 90% of the assessed tax, he shall pay simple interest at 2% for every month or part of month comprised in the period from the 1st day of April next following such financial year to the date of regular assessment. The interest shall be calculated in cases where no advance tax has been paid, on the assessee tax and in cases where the advance tax paid is less that 90% of the assessed tax, on the difference between the assessed tax and the advance tax paid.

It has been clarified that,�

(1) �assessed tax� means the tax on total income determined on regular assessment as reduced by tax deducted at source from any income included in such total income;

(2) for the purposes of this section, an assessment made for the first time under section 147 shall be regarded as a regular assessment; and

(3) for the purposes of computing interest under this section, additional income-tax payable under the new section 158B shall not be taken into consideration.

(ii) Sub-section (2) provides for the mode of computation of interest, where assessee has paid any tax under section 140A before the completion of regular assessment, as follows :

(a) Interest shall be calculted in accordance with the provisions of sub-section (1) upto the date of payment of tax under section 140A and reduced by the amount of interest, if any, paid under section 140A towards interest chargeable under this section.

(b) Thereafter, interest shall be calculated on the amount by which the tax paid under section 140A together with the advance tax paid falls short of the assessed tax.

(iii) Sub-section (3) provides for charge and mode of computation of interest where the tax on total income determined on regular assessment is increased as a result of an order of reassessment or recomputation under section 147.

(iv) Sub-sections (4) and (5) contain provisions similar to those of the corresponding sub-section 234A (Refer para 10.3 ante) relating to revision of the amount of interest and the applicability of the provisions of the section from the assessment year 1989-90 onwards.

       (Refer Examples III and IV in para 10.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.7 Amendments made in section 234B by the Amending Act, 1989 - The Amending Act, 1989 has made various amendments in section 234B, which are on the same lines as amendments made in section 234A, as explained in paras 10.4 and 10.5 ante. Briefly the purposes of the amendments are,�

  (i) to provide for calculation and charge of interest on the basis of total income determined under the provisions of the new section 143(1);

(ii) to provide for calculation and payment of interest by the assessee under section 140A at the time of filing his return;

       (Refer to Examples II to IV in para 10.13)

(iii) to delete reference to section 158B and to replace it, wherever necessary, by reference to section 143(1A); and

(iv) to include reference to �tax collected at source� consequent upon the insertion of the provision of section 206C by the Finance Act, 1988.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.8 Charge of mandatory interest for deferment of instalments of advance tax (new section 234C) - The provisions of the new section 234C inserted by the Amending Act, 1987, which have replaced the old provisions of section 216, are as follows:�

  (i) Sub-section (1) provides that where in any financial year the advance tax paid by the assessee on his current income,�

(1) on or before the due date of first instalment (15th September) is less than 20% of the tax due on returned income, or

(2) on or before the due date of second instalment (15th December) is less than 50% of the tax due on the returned income, then the assessee shall pay simple interest at 1.5% per month of the shortfall from 20% in a case falling in (1) above and of the shortfall from 50% in a case falling in (2) above. In each case interest shall be chargeable for a period of three months.

       It is clarified that �tax due on returned income� means the tax chargeable on the total income declared in the relevant return of income, as reduced by the amount of tax deductible at source in accordance with the provisions of chapter XVII-B on any income which is subject to such deduction and which is included in such total income.

       (Refer to Example V in para 10.13)

(ii) Sub-section (2) provides that the provisions of this section shall apply to the assessment year 1989-90 and subsequent assessment years.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.9 Amendments made in section 234C by the Amending Act, 1989  - As explained earlier (para 10.2 of part I of the Explanatory Notes), advance tax is now also payable on capital gains and income of casual nature referred to in section 2(24)(ix). Numerous representations were received pointing out hardships on account of the inability to estimate the expected income from these sources and pay advance tax thereon in three instalments, in cases where any such income arose after the due date of instalment or instalments. To remove this hardship, the Amending Act, 1989 has inserted a proviso in sub-section (1) of section 234C to provide that no interest shall be levied under the section in respect of any shortfall in the payment of instalment of advance tax, if the shortfall is on account of failure to estimate the income expected from capital gains or income of casual nature referred to in section 2(24)(ix) and the assessee has paid the whole amount of the tax payable in  respect of such income as part of the instalment of advance tax which is immediately due after the accrual of such income. It is also provided that where any such income arises after the due dates of all the instalments are over, i.e., after the 15th March of a financial year, advance tax thereon may be paid by the 31st March of that financial year without payment of interest envisaged in this section.

(Refer Example VI in para 10.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.10 The Amending Act, 1989 has also amended the Explanation in sub-section (1) to include reference to �tax collectible at source� in the Explanation consequent upon the insertion of the provisions of section 206C by the Finance Act, 1988.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.11 Meaning of the expression �month or part of a month� used in sections 234A and 234B - Under the provisions of sections 234A and 234B, interest is charged at 2% per month or part of a month. This means that even where the delay is for part of a month say even for 1 day, interest at 2% will be charged. Thus, for example, where a return of income, which is due on 31-8-1989, is filed on 9-11-1989, interest shall be charged at 2% per month for three months (i.e., for the months of September, October and 9 days forming part of the month of November). In other words, interest chargeable in such  a case will be at 6%.

(Refer Example III in para 9.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.12 Whether interest under sections 234A, 234B and 234C can be waived - The provisions regarding levy of interest under sections 234A, 234B, and 234C are mandatory and cannot be waived. There are no provisions, either in the Income-tax Act or in the Income-tax Rules, to waive the interest chargeable under these sections.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.13 Examples to illustrate the calculation of interest under sections 234A, 234B and 234C - The calculation of interest under the provisions of sections 234A, 234B and 234C may be illustrated by means of the following examples :

Exemple 1 : Late filing of return - Interest payable by the assessee under section 234A at the time of filing the return of income :

*Note: Since the advance tax paid (Rs. 2,80,000) is more than 90% of the tax on returned income (90% of Rs. 3,00,000), no interest is payable under section 234B at the time of filing the return of income.

If, however, the returned income is increased, either as a result of adjustments made under the first proviso to section 143(1)(a) or as a result of regular assessment under section 143(3) so that the advance tax paid (Rs. 2,80,000) becomes less than 90% of the tax on total income determined under section 143(1)(a) or on regular assessment, interest under section 234B shall also become chargeable. In such a situation interest under section 234A will also be increased on the basis of the tax on total income determined under section 143(1)(a) or on regular assessment.

Example II : Late filing of return and underpayment of advance tax - Interest payable by the assessee under sections 234A and 234B at the time of filing the return of income:

*Note: Since the advance tax paid is less than 90% of the tax on returned income, interest under section 234B is payable by the assessee at the time of filing his return of income.

Example III  : Late filing of return and non-payment of advance tax- Interest payable by the assessee under sections 234A and 234B at the time of filing the return and on regular assessment :

A. Interest under section 234A:

*Note : Interest under sections 234A and 234B is to be charged for full month, even where there is delay of part of a month

Example IV : Late filing of return and under payment of advance tax in a case where tax has also been deducted at source - Interest payable by the assessee under sections 234A and 234B at the time of filing the return and on regular assessment:

*Note : Since advance tax paid (Rs. 1,60,000) is less than 90% of the assessed tax (Rs. 1,80,000) interest shall be payable by the assessee under section 234B.

Example V : Deferment of instalment of advance tax - Interest payable by the assessee under section 234C.

(vi) Interest under section 234C will be calculated as under :

Example VI : Deferment of instalments of advance tax in a case involving capital gains tax - Interest payable by the assessee under section 234C:

*Notes: The entire tax of Rs. 50,000 on capital gains is payable in the second instalment due on 15-12-11989. Therefore, only the balance amount of tax, i.e., Rs. 1,50,000 is to be allocated in these instalments.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

10.14 These amendments come into force with effect from the 1st day of April, 1989. As already pointed out earlier, the provisions of the new sections 234A, 234B and 234C shall apply to the assessment year 1989-90 and subsequent assessment years. As regards the provisions of sections 139(8), 215, 216, 217, 271(1)(a) and 273, which have been replaced by the aforesaid new sections, amendments have been made in these sections to secure that these do not apply from the assessment year 1989-90 onwards.

[Section 42(h), 82(b), 94 and 112 of the Amending Act, 1987]

[Sections 50(c), 38, 39 and 40 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Payment of interest by the department for delay in grant of refund due to the assessee

11.1 The old provisions regarding payment of interest by the Department - The old provisions in the Income-tax Act, provided for payment of interest by the Department on refunds due to the assessees were contained in the following sections of the Act:

    (i) Section 214, relating to payment of interest to the assessee on the excess amount paid as advance tax.

   (ii) Section 243, relating to payment of interest to the assessee for delay in granting the refund after a claim for refund was made or after the refund was determined.

  (iii) Section 244, relating to payment of interest to the assessee for delay in granting refund as a result of appeal, etc.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.2 Insertion  of a new section 244A in lieu of sections 214, 243 and 244  - Under the provisions of section 214, interest was payable to the assessee on any excess advance tax paid by him in a financial year from the 1st day of April next following the said financial year to the date of regular assessment. In case the refund was not granted within three months from the end of the month in which the regular assessment was completed, section 243 provided for further payment of interest under section 244 interest was payable to the assessee for delay in payment of refund as a result of an order passed in appeal, etc., from the date following after the expiry of three months from the end of the month in which such order was passed to the date on which refund was granted. The rate of interest under all the three sections was 15 per cent per annum.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.3 These provisions, apart from being complicated, left certain gaps for which interest was not paid by the department to the assessee for money remaining with the Government. To remove this inequity, as also to simplify the provisions in this regard the Amending Act, 1987 has inserted a new section 244A in the Income-tax Act, applicable from the assessment year 1989-90 and onwards, which contains all the provisions for payment of interest by the department on delay in the grant of refunds. The rate of interest has been invreased from the earlier 15% per annum to 1.5% per month or part of a month comprised in the period of delay in the grant to refund. The Amending Act, 1987 has also amended sections 214, 243 and 244 to provide that the provisions of these sections shall not apply to the assessment year 1989-90 or any subsequent assessment years.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.4 The provisions of the new section 244A - The provisions of the new section 224A are as under:

  (i) Sub-section (1) provides that where in pursuance of any order passed under this Act refund of any amount becomes due to the assessee, then

(a) if the refund is out of any advance tax paid or tax deducted at source during the financial year immediately preceding the assessment year, interest shall be payable for the period starting from the 1st April of the assessment year and on the date of grant of the refund. No interest shall, however, be payable if the amount of refund is less than 10% of the tax determined on regular assessment.

(b) if the refund is out of any tax, other than advance tax or tax deducted at source, or penalty, interest shall be payable for the period starting from the date of payment of such tax or penalty and ending on the date of the grant of the refund. (Refer to Example III in Para 11.8).

       The interest is to be calculated @ 1.5% �per month or part of a month� comprised in the period of delay for which the interest is payable. As already explained in para 10.11 ante, the meaning of this expression is that even where the delay is for part of a month, interest @ 1.5% will be charged.

(ii) Sub-section (2) provides that for the purpose of computing the period of delay under sub-section (1), any period of delay attributable to the assessee shall be excluded. (Refer to Example II Para 11.8).

(iii) Sub-section (3) provides for automatic revision of the amount of interest on refund where the amount of refund is varied as a result of an order of reassessment, rectification, appeal, revision or settlement mentioned in the sub-section.

(iv) Sub-section (iv) provides that the provisions of this section shall apply to the assessment year 1989-90 and subsequent assessment years.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.5 Amendments in section 244A by the Amending Act, 1989 - The new section 244A inserted by the Amending Act, 1987 provided for calculation and payment of interest to the assessee only where the refund became due to him in pursuance of an order passed under the Act. It did not provide for payment of interest where refund became due to the assessee under the provisions of the new section 143(1) without passing an assessment order. The Amending Act, 1989, has, therefore, amended sub-section (1) of this section to provide for calculation and payment of interest to the assessee on refund becoming due to him in pursuance of total income determined under the provisions of the new section 11.4(i). (Refer Examples I and II in Para 11.8).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.6 The Amending Act, 1989, has further included reference to �tax collected at source� in the section consequent upon the insertion of section 206C of the Income-tax Act, by the Finance Act, 1988.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.7 The Amending Act, 1989 has also amended sub-section (3) of this section to include reference to the order passed under section 143(3) for the purposes of calculation of revised interest under this sub-section. The effect is that any interest granted on refund becoming due in pursuance of the provisions of section 143(1) will also be revised if the amount of refund is reduced as a result of an assessment order under section 143(3) passed in the case.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.8 Examples to illustrate the calculation of interest under section 244A - The calculation of interest under the provisions of section 244A may be illustrated by means of the following Examples:

Example 1: Grant of refund under section 143(1) out of advance tax paid or tax deducted at source - Interest payable by the department under section 244A:-

*Note: Interest is to be paid for full month even where the delay is for part of a month.

Example II: Grant of refund under section 143(1) out of advance tax paid or tax deducted at source in a case where the return is filed late by the assessee - interest payable by the Department under section 244A :

*Note: Under the provisions of section 244A(2) interest shall not be payable, by the Government for the period of delay attributable to the assessee. Since in the present case delay of 4 months in filing the return is attributable to the assessee, interest shall not be payable to him for this period.

Example III : Grant of refund as a result of appellate order - Interest payable by the Department under section 244A :

*Notes : Since the tax has been correctly paid and the return has been filed in time neither any tax or interest is due from the assessee nor any refund is due to him. Therefore, no action under section 143(1) is necessary.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

11.9 These amendments come into force with effect from the 1st day of April, 1989. As already pointed out earlier, the provisions of the new section 244A shall apply to the assessment 1989-90 and subsequent assessment years, while the provisions of sections 214, 243 and 244, which have been replaced by the provisions of new sections 244A, shall cease to apply to the assessment year 1989-90 and onwards.

[Sections 82(b), 96, 97 and 98 of the Amending Act, 1987]

[Section 41 of the Amending Act, 1989]

AMENDMENTS TO THE WEALTH-TAX ACT

Direct Tax Laws (Amendment) Act, 1987-III

12.1 The provisions of the Wealth-tax Act relating to the valuation date, procedure for assessment, charge of mandatory interest for default in furnishing the return of wealth, payment of interest by the Government on refund due to the assessee and rectification of mistake correspond with the provisions of the Income-tax Act, which have been discussed in the preceding paras in this part of the Explanatory Notes. The Amending Act, 1987 and the Amending Act, 1989 have made amendments to these provisions of the Wealth-tax Act to bring them broadly in line with the corresponding provisions in the Income-tax Act, as they have emerged after their amendment by the two Amending, Acts. The Table below shows these provisions of the Wealth-tax Act that have been so amended and the corresponding provisions, if any, of the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987 and the Amending Act, 1989, which have carried out the necessary amendments, and the subject-matter of the amendments in brief.

TABLE