AMENDMENTS TO INCOME-TAX  ACT

MEASURES FOR RAISING ADDITIONAL REVENUE

FINANCE (NO. 2) ACT, 1971

Long-term capital gains

6. Under the provisions of the Income-tax Act, long-term capital gains, i.e. capital gains arising from the transfer of a capital asset which is held for more than 24 months from the date of acquisition, are charged to tax on a concessional basis. In the case of taxpayers other than companies, the concession is allowed by deducting a specified proportion of the long-term capital gains in computing the taxable income, vide section 80T. In the case of companies, lower rates of tax have been specified in respect of long-term capital gains, under section 115. With a view to increasing the incidence of tax on long-term capital gains, the following amendments have been made in the relevant provisions of the Income-tax Act :

1. Taxpayers other than companies - By virtue of the amendment of section 80T, under section 23 of the Finance (No. 2) Act, 1971, the deduction in respect of long-term capital gains in computing the taxable income in such cases will be as under :

   a.  Long-term capital gains relating to buildings or lands or any rights therein - The deduction will be Rs. 5,000 plus 35 per cent of the amount of such gains over Rs. 5,000 (as against 45 per cent before the amendment).

   b.  Long-term capital gains relating to other capital assets - The deduction will be Rs. 5,000 plus 50 per cent of the amount by which such gains exceed Rs. 5,000 (as against 65 per cent before the amendment).

2. Companies - Under section 115, as amended by section 25 of the Finance (No. 2) Act, 1971, the rates of tax in respect of long-term capital gains in such cases will be as under :

   a.   Long-term capital gains relating to buildings or lands or any rights therein - The rate of tax will be 45 per cent, as against 40 per cent before the amendment.

   b.  Long-term capital gains relating to other capital assets - The rate of tax will be 35 per cent, as against 30 per cent before the amendment.

FINANCE (NO. 2) ACT, 1971

7. The changes set forth in the preceding paragraph will become effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it.

 FINANCE (NO. 2) ACT, 1971

Priority industries

8. Under the existing law, income derived by certain domestic companies from specified priority  industries is charged to tax on concessional basis. The priority industries specified for this purpose comprise the following :

   a.  the business of generation or distribution of electricity or any other form of power;

   b.  the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth  Schedule; and

    c.  the business of any hotel where this business is carried on by an Indian company and the hotel is, for the time being approved in this behalf by the Central Government.

The concessional taxation of certain domestic  companies in respect of their profits derived from these industries is brought about by allowing a deduction of a specified percentage of such profits in computing the total income of the domestic company vide section 80-I.

FINANCE (NO. 2) ACT, 1971

9. The Finance (No. 2) Act, 1971 has amended section 80-I and the Sixth Schedule so as to bring about an increase in the incidence of tax on profits from priority industries and to exclude certain industries from the priority list. These amendments are as follows :

1. Under section 80-I, as amended by section 16 of the Finance (No. 2) Act, 1971, the quantum of deduction admissible to a domestic company in respect of profits derived by it from such industries has been reduced from 8 per cent to 5 per cent of such profits.

2. Under the amendment of the Sixth Schedule by section 30 of the Finance (No. 2) Act, 1971, the following items have been omitted from the list of articles and things relating to priority industries in that Schedule :

   a.  Aluminium (metal), formerly included in item 2 of the list.

   b.  Motor trucks and buses, formerly listed as item 10.

    c.  Cement and refractories, formerly listed as item 12.

   d.  Soda ash, formerly listed as item 14.

    e.  Petro-chemicals, formerly listed as item 18.

    f.  Automobile ancillaries, formerly listed as item 20.

Profits from the manufacture of these articles will not, hereafter, qualify for the deduction under section 80-I.

FINANCE (NO. 2) ACT, 1971

10. The changes set forth in the preceding paragraph will come into effect on 1-4-1972 and will, accordingly, apply from the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting period corresponding to it.

 INCENTIVES FOR SAVINGS AND INVESTMENT

FINANCE (NO. 2) ACT, 1971

Deduction in respect of long-term savings in specified media

11. Under the provisions of section 80C, tax relief is allowed in respect of long-term savings effected by certain categories of taxpayers out of their income. In the case of an individual, long-term savings through life insurance or deferred annuity policies on the life of the individual, his spouse or child, certain provident funds and superannuation funds and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for tax relief. In the case of Hindu undivided families, long-term savings effected through insurance policies on the life of any member of the family qualify for tax relief. In the case of an assessee being an association of persons or a body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu, long-term savings through policies of life insurance or for deferred annuities on the life of any member of such association or body or on the life of any child or either member, as also through the Public Provident Fund and 10-Year and 15-Year Cumulative Time Deposit Accounts, qualify for the tax relief. Prior to the amendment of section 80C by section 15 of the Finance (No. 2) Act, 1971, the tax relief was allowed by deducting 60 per cent of the first Rs. 5,000 of the qualifying savings plus 50 per cent of the balance of such savings, in computing the taxable income of the assessee. With a view to providing a further incentive for effective long-term savings, particularly by taxpayers in the lower and middle income brackets, the following changes have been made in the relevant provisions :

1. The  quantum of the deduction in respect of long-term savings in computing the taxable income has been varied so as to allow a deduction of the whole of the first Rs. 1,000 of the qualifying savings plus 50 per cent of the next Rs. 4,000 plus 40 per cent of the remainder of such savings. [This will mean that in the case of a person who saves Rs. 1,000 or less, the whole of such savings will be allowed as a deduction from his taxable income, as against 60 per cent of such savings formerly. In the case of a person who saves more than Rs. 1,000 but less than Rs. 5,000, the amount of the deduction will be higher than formerly. On a saving of Rs. 5,000 the quantum of the deduction remains the same, namely Rs. 3,000.]

2. The monetary limit over the savings qualifying for the deduction has been increased from Rs. 15,000 to Rs. 20,000 in the case of an individual and also in the case of a married couple governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. [The monetary limit of Rs. 30,000 applicable to the qualifying savings by a Hindu undivided family, remains unchanged.]

FINANCE (NO. 2) ACT, 1971

12.  The changes set forth in the preceding paragraph will take effect from
1-4-1972 and will, accordingly, apply for the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it.

 FINANCE (NO. 2) ACT, 1971

Deduction in respect of incomes from specified  financial assets

13. Under a provision introduced through the Finance Act, 1970, income derived by a taxpayer from investments in specified categories of financial assets is exempt from tax up to an aggregate amount of Rs. 3,000 which is deducted in computing the taxable income. The investments covered by this provision are : (i) Government securities; (ii) notified debentures; (iii) deposits under notified schemes of the Central Government; (iv) shares in Indian companies; (v) units in the Unit Trust of India; (vi) deposits with banking companies, co-operative banks, land mortgage banks and land development banks; and (vii) deposits with approved financial corporations engaged in providing long-term finance for industrial development in India. Section 80L, which deals with this matter, has been amended by section 17 of the Finance (No. 2) Act, 1971, so as to modify this provision in certain respects as  explained hereunder :

1. The deduction under this provision has been limited to individuals, Hindu undivided families, and associations of persons or bodies of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. It will, therefore, not be allowed henceforth in the case of other categories of taxpayers, such as companies, partnership firms, etc.

2. Deposits with a co-operative society made by a member of the society have been included in the categories of financial assets specified in the provision. Accordingly, interest on such deposits will also qualify for the deduction under this provision, along with incomes derived from the financial assets already listed therein.

FINANCE (NO. 2) ACT, 1971

14. The changes set forth in the preceding paragraph will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73  in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it.

 IMPOSITION OF RESTRAINTS ON BUSINESS EXPENSES SO AS
TO REDUCE INCOME DISPARITIES

FINANCE (NO. 2) ACT, 1971

Expenditure on payment of salaries or provision of perquisites to employees

15. With a view to imposing restraints on business expenses so as to reduce income disparities, a provision has been made in a new sub-section (5) introduced in section 40A by section 10 of the Finance (No. 2) Act, 1971 placing certain ceiling limits on the deductible amount of expenditure incurred by a taxpayer on payment of salary to any employee or a former employee or in providing any perquisites, etc., to any such employee. Under the new provision, expenditure incurred by an assessee on payment of salary to an employee in respect of the period of his employment in India during the relevant year will not be allowed as a deduction in computing the taxable profits to the extent it exceeds an amount calculated at the rate of Rs. 5,000 for each month or part of such period. Similarly, expenditure incurred by the assessee on payment of salary to a former employee, i.e., an individual who ceases or ceased to be the employee of the assessee during the previous year or any earlier previous year, will not be allowed as deduction in computing the taxable profits to the extent it exceeds Rs. 60,000 for the year. For this purpose, "salary" has been defined, broadly, on the lines of the provision in section 17, subject to certain modifications. The expression "salary" will include wages, any annuity or pension; any gratuity; any fees or commission; profits in lieu of or in addition to any salary or wages; any advance of salary; and the annual accretion to the balance at the credit of an employee participating in a recognised provided fund to the extent it is chargeable to tax. In this context, the expression "profits in lieu of salary" will have the same meaning as in section 17(3) and will, therefore, include any compensation paid by the assessee to an employee or a former employee in connection with the termination of his employment or modification of the terms and conditions relating thereto. The term "salary" will, however, not include "perquisite" and the sums transferred from the account of the employee in an unrecognised provident fund to a recognised provident fund.

FINANCE (NO. 2) ACT, 1971

16. Under section 40(a )(v) [as it stood before its omission by the Finance (No. 2) Act, 1971], any expenditure which resulted directly or indirectly in the provision of any benefit or amenity or perquisite to an employee or any expenditure or allowance in respect of any assets of the assessee used by such employee either wholly or partly for his own purposes or benefit, was not allowable as deduction in computing the taxable profits of the business or profession to the extent the aggregate of such expenditure and allowance exceeded one-fifth of the salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of his employment during  the relevant accounting year, whichever is less. This provision has now been omitted from section 40 by section 9 of the Finance (No. 2) Act, 1971, and a modified provision has been incorporated in the new sub-section (5) of section 40A inserted by section 10 of the Finance (No. 2) Act, 1971. Under the  new provision, the aggregate of expenditure incurred by an assessee in providing any perquisite, whether convertible into money or not, to an employee, and the amount of expenditure or allowance (such as depreciation allowance) in respect of assets of the assessee used by the employee for his own purposes or benefit, will not be allowed as deduction, in computing the profits of the business or profession, to the extent it exceeds 20 per cent of the amount of salary payable to the employee or an amount calculated at the rate of Rs. 1,000 for each month or part thereof comprised in the period of employment of the  employee in India during the relevant accounting year, whichever  is less. For this purpose, the expression "perquisite" has been defined to mean : (i ) rent-free accommodation provided to employee by the assessee; (ii) any concession in the matter of rent respecting any accommodation provided to the employee by the assessee; (iii) any benefit or amenity granted or provided free of cost or at concessional rate to the employee by the assessee; (iv) payment by the assessee of any sum in respect of any obligation which but for payment by the assessee would have been payable by the employee, e.g., provision of educational facilities for the employee’s children, reimbursement of employee’s club bills,  hotel bills, etc., by the assessee; (v) payment by the assessee of any sum, whether directly or through a fund (other than a recognised provident fund or an approved superannuation fund), to effect an assurance on the life of the employee or to effect a contract for an annuity.

FINANCE (NO. 2) ACT, 1971

17. It has been specifically provided that the following items will not be taken into account in computing the expenditure or allowance that will not be deductible under the new provisions set forth in paragraphs 15 and 16 :

1.  The value of any travel concession or assistance granted by the assessee to an employee who is a citizen of India (and his spouse and children) in connection with his proceeding to any place in India, whether on leave or  after retirement from service, to the extent the amount thereof does not exceed the value of the travel concession or assistance which would have been received by the employee if he had proceeded to his home district in India. [The value of such travel concession or assistance is already exempt from tax under section 10(5).]

2. Passage moneys or the value of any free or concessional passage granted by the assessee to an employee who is not a citizen of India (and his spouse and children) in connection with his proceeding to his home country out of India, whether on leave or on retirement from service. [Such passage moneys and the value of such free or concessional passage is already exempt from tax under section 10(6)( i).]

3. The employer’s contributions to the employee’s account in a recognised provident fund or an approved superannuation fund or for the employee’s benefit to an approved gratuity fund.

4. Where the assessee is a company, expenditure incurred by it for the purpose of promoting family planning amongst its employees.

FINANCE (NO. 2) ACT, 1971

18. The ceiling limit over the deductible amount of expenditure in respect of salary and perquisites, etc., as explained above, will, however, not be applicable to the expenditure or allowance in relation to the following :

1. Any employee in respect of any period of his employment outside India.

2. Any employee being a foreign technician who is entitled to exemption from tax on his remuneration under section 10(6)( vii) or section 10(6)( viia).

3. Any employee whose income chargeable under the head "Salaries" does not exceed Rs. 7,500 per annum.

FINANCE (NO. 2) ACT, 1971

19. In order to prevent the frustration of the new restrictions set forth in the preceding paragraphs by converting "contracts of service" into "contracts for service", it has been provided in a new sub-section (6) of section 40A that expenditure incurred by an assessee in payment of fees for services rendered by a person, who at any time during the 24 months immediately preceding the relevant accounting year was his employee, will not be allowed as a deduction in computing the taxable profits of the assessee to the extent it exceeds Rs. 60,000 in a year. In a case where the assessee also incurs, in relation to such person, any expenditure on payment of salary [as defined under sub-section (5)], the deduction in respect of expenditure on payment of fees and that on payment of salary will be limited to Rs.  60,000 in the aggregate.

 FINANCE (NO. 2) ACT, 1971

Expenditure on provision of remuneration, benefit or amenity to directors of companies and certain other persons

20. Under section 40(c ), expenditure incurred by a company on the provision of any remuneration or benefit or amenity to a director or a person who has a substantial interest in the company or to a relative of the director or of such person, and the expenditure or allowance in respect of any assets of the company which are used by such persons for their own purposes or benefit, is not allowable as a deduction in computing the taxable profits of the company, to the extent such expenditure or allowance is, in the opinion of the Income-tax Officer, excessive or unreasonable. This provision has been amended by section 9 of the Finance (No. 2) Act, 1971 in order to secure that the aggregate of such expenditure and allowance will be further subject to an overall ceiling limit of Rs. 72,000, in a year, in respect of any one director or person who has a substantial interest in the company or a relative of the director or such person. Where such expenditure or allowance relates to only a part of a year, the monetary ceiling will be an amount calculated at the rate of Rs. 6,000 per month or part of a month comprised in the period to which the expenditure or allowance relates. Where the director or other person or relative is also an employee of the company, expenditure of the nature referred to in clauses (i), (ii), (iii ) and (iv) of the second proviso to section 40A(5)(a) (reproduced in paragraph 17 above), will not be taken into account for applying the ceiling.

FINANCE (NO. 2) ACT, 1971

21. It has been specifically provided [in the first proviso to section 40A(5)(a)] that where a company incurs expenditure on payment of any salary or the provision of any perquisite to a person, who, besides being an employee of the company, is also a director of the company or a person who has a  substantial interest in it or a relative of a director of such person, the deduction to the company in respect of such expenditure, taken together with the allowance in respect of assets provided for his use, shall not exceed Rs. 72,000 for the year. This provision will be relevant in a case where an individual is a director, etc., of the company for a part of the year and a mere employee (or former employee) for the remainder of the year, and the aggregate ceiling calculated under sections 40(c) and 40A(5) with reference to the number of months or part of months comprised in the two periods adds up to more than Rs. 72,000 for the year.

FINANCE (NO. 2) ACT, 1971

22. A consequential amendment to section 58 by section 12 of the Finance  (No. 2) Act, 1971 has omitted the reference to section 40(a)( v) in section 58(1)(a)( iv). The amended provisions of section 40(c) and also the  new provisions in section 40A(5) and (6) will apply in computing the income chargeable under the head "Income from other sources", by virtue of the existing provisions in section 58(1)(b) and section 58(2).

FINANCE (NO. 2) ACT, 1971

23. The provisions set forth in paragraphs 15 to 22  above will be effective from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73 in relation to current incomes of the financial year 1971-72 or other accounting year corresponding to it.

 FINANCE (NO. 2) ACT, 1971

Expenditure incurred on travelling by employees and other persons for the purposes of business or profession

24. Section 37(3) provides that deduction for expenditure incurred in a business or profession in connection with travelling by employees and other persons (e.g., directors of a company, partners of a firm, etc.) for the purposes of the business or profession, in computing the taxable profits of the business or profession, shall be subject to the limits and conditions specified in the Income-tax Rules. In pursuance of this provision, certain limits over the deductible amount of expenditure on travelling have been specified in rule 6D of the Income-tax Rules. Under this rule, expenditure incurred by an assessee in connection with travelling by an employee or any other person within India outside the headquarters of such employee or other person for the purposes of the business or profession of the assessee is limited to the aggregate of :

   a.  the actual expenditure, in respect of travel by rail, road, waterways or air, and

   b.  an amount calculated at specified rates per day or part thereof of the period spent outside such headquarters, in respect of any other expenditure (including hotel expenses or allowances paid) in connection with such travel.

The rates of daily allowance for the purpose of computing the amount under item (b) above as laid down in rule 6D before its recent amendment were as under :

The rates of Rs. 100 and Rs. 50 specified at (i) and (ii) above are to be increased, respectively, to Rs. 150 and Rs. 75 in respect of the period of stay of the employee or other person at Bombay, Calcutta or Delhi.

FINANCE (NO. 2) ACT, 1971

25. With a view to curbing ostentatious expenditure on travelling for business purposes, rule 6D of the Income-tax Rules has been amended by the Income-tax (Third Amendment) Rules, 1971 [Notification No. SO 2168, dated 28-5-1971]. Under the amendment, the rate of daily allowance of Rs. 100, specified at (i) of sub-rule (2)(b) of rule 6D, has been reduced to Rs. 80, and the rate of Rs. 50, specified against (ii) of the said sub-rule, has been reduced to Rs. 40. In respect of the period spent by the employee or other person (outside his headquarters) at Bombay, Calcutta or Delhi, the reduced limits over the deductible amount of daily allowance will be Rs. 120 and Rs. 60 respectively. The reduced rates will take effect from 1-4-1972 and will, accordingly, apply to the assessment year 1972-73, i.e., in respect of current incomes of the financial year 1971-72 or other accounting period corresponding to it.

 MEASURES FOR RATIONALISATION OF CERTAIN PROVISIONS
OF INCOME-TAX LAW

FINANCE (NO. 2) ACT, 1971

Development rebate

26. The Income-tax Act provides for the grant of a deduction by way of development rebate on machinery and plant installed for the purpose of the business, in computing the taxable profits of the business. This deduction has been in force since 1955 and is designed to enable industry to generate internal finances for replacement of machinery and equipment in a period of rising costs and increasing sophistication. The rates of development rebate currently in force are :

Lower rates apply in the case of second-hand ships and second-hand machinery and plant acquired from abroad.

FINANCE (NO. 2) ACT, 1971

27. In his Budget Speech for the year 1971-72, the Minister of Finance observed as under :

"The practice of offering a development rebate in respect of new investment has had, I feel, a full play. I am, accordingly, serving the required notice that no development rebate will be allowed on ships acquired or machinery or plant installed after 31-5-1974. Whatever the revenue implications of this step - and they are sizeable - will be fully revealed only after 1974-75, i.e., from the Fifth Plan onwards. But, I shall consider myself amply rewarded if advance notice of this change quickens the pace of investment in the remaining years of the Fourth  Plan."

FINANCE (NO. 2) ACT, 1971

28. In pursuance of the above announcement, the Central Government has issued Notification No. SO 2167, dated 28-5-1971, in exercise of the powers conferred by section 33(5) directing that the deduction in respect of development rebate shall not be allowed in respect of a ship acquired or machinery or plant installed after 31-5-1974.

 FINANCE (NO. 2) ACT, 1971

Definition of "company"

29. Under section 2(17 ), before its amendment by the Finance (No. 2) Act, 1971, the term "company" was defined, inter alia, to mean : (i) any Indian company; or (ii) any association, whether incorporated or not and whether Indian or non-Indian which is declared by a general or special order of the Central Board of Direct Taxes to be a company for the tax purposes of the Act. This power to declare any association to be a "company" for tax purposes has been made use of for several years past with a view to conferring the status of a "company" on foreign companies as also on entities which are not otherwise within the scope of that concept. Such declaration is given by the Board, ordinarily, in the case of any entity which possesses the ordinary characteristics of a company limited by shares and which is a legal person according to the laws of the country in which it is incorporated. Besides declaring companies registered in foreign countries to be "companies" for purposes of taxation in India, statutory corporations established by a Central, Provincial or State enactment, such as road transport corporations, air transport corporations, etc., have been declared to be companies. Foreign corporations in which the capital is held wholly or partly by a foreign Government have also been declared as "companies" for the  purposes of income-tax, where such corporations are legal entities separate from the Government and are capable of holding property independently and of suing and being sued according to the laws of that country. The provision has also been used, on a few occasions, to confer the status of company on bodies such as chambers of commerce, clubs, etc., even though these bodies do not possess the ordinary characteristics of a company limited by shares. The declaration under this provision has been given in some  cases with retrospective effect to cover past years as well.

FINANCE (NO. 2) ACT, 1971

30. The requirement that a foreign company could be treated as a company for purposes of the Income-tax Act only if it has been declared as a company by the Board generates unnecessary work. Further, giving retrospective effect to declarations made in the case of foreign companies or other non-corporate entities may not be said to be strictly in accordance with the provisions of the law. In order to place the existing practice, that has been followed over the last many years, on a statutory footing and to reduce the number of cases in which declaration as a company has to be given by the Board, the definition of "company" in section 2(17) has been amended by section 3(a) of the Finance  (No. 2) Act, 1971. Under the amended definition, the term "company" will include, besides an Indian company, any body corporate incorporated by or under the laws of any country outside India. The term will also include any institution, association or body which is or was assessable or was assessed, under the 1922 Act or the 1961 Act, as a company for any assessment year up to and including the assessment year 1970-71. Further, as under the earlier definition, the Central Board of Direct Taxes will have the power to declare, by general or special order, that any institution, association or body, whether incorporated or not and whether Indian or non-Indian, will be treated as a "company" for purposes of the Income-tax Act. This power of the Board has now been specifically made exercisable even in relation to past assessment years (whether commencing before, or on, or after 1-4-1971) and the declaration will have effect for any assessment year or years specified therein.

 FINANCE (NO. 2) ACT, 1971

Definition of "Indian company"

31. The definition of the term "Indian company" in section 2(26) before its amendment by the Finance (No. 2) Act, 1971, covered only those companies which are formed and registered under the Companies Act, 1956, or the law relating to companies formerly in force in any part of India including Jammu and Kashmir or in the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu and Pondicherry. It did not cover statutory corporations which, as stated in paragraph 29, had to seek a declaration to be a "company" for purposes of taxation. Such a declaration did not, however, confer the status of "Indian company" on such statutory corporations. Apart from this, statutory corporations, by their very nature, do not often have a share capital as such and hence such a corporation is not in a position to qualify for being treated as a "domestic company", i.e., an Indian company or a company which has made the prescribed arrangements for the declaration and payment of dividends within India. This position sometimes results in unintended difficulties both as regards the rates of tax applicable to the corporation’s income and also its eligibility to some of the tax concessions, such as the export markets development allowance, which are available only to domestic companies. The definition of "Indian company" in section 2(26) has, therefore, been amended by section 3(c) of the Finance (No. 2) Act, 1971 so as to cover statutory corporations established in India  as also any institution, association or body which is declared by the Board to be a company under section 2(17) and which has its principal office in India.

 FINANCE (NO. 2) ACT, 1971

Definition of "a company in which the public are substantially interested"

32. The Income-tax Act makes a distinction in tax treatment as  between a widely-held domestic company (i.e., a domestic company in which the public are substantially interested) and a closely-held domestic company ( i.e., a domestic company in which the public are not substantially interested). Closely-held companies are required (subject to certain exceptions) to distribute dividends up to the statutory percentage of their distributable income failing which they are liable to  pay additional income-tax with reference to their undistributed profits. Closely-held companies are (subject to certain  exceptions) also liable to income-tax on their income at rates which are higher than the rates applicable in the case of widely-held domestic companies.

FINANCE (NO. 2) ACT, 1971

33. A company is treated, for purposes of income-tax, as "a company in which the public are substantially interested", only if it satisfies the various tests laid down in the definition of the term in section 2(18). Broadly speaking the aim of these tests is to decide whether there is wide public participation in the ownership of the shares in, and control over, the affairs of the company. Entities like chambers of commerce, clubs, etc., which are  declared to be "companies" by the Board under the relevant provisions of the Income-tax Act, are essentially non-profit making concerns and in the absence of share capital, in the ordinary sense of the term, it is not practicable to apply to such entities the tests of "a company in which the public are substantially interested". The same difficulty arises with regard to companies limited by guarantee.

FINANCE (NO. 2) ACT, 1971

34. In order to  obviate the difficulties pointed out above, the definition of "a company in which the public are substantially interested " in section 2(18) has been amended by section 3(b) of the Finance (No. 2) Act, 1971 in order to provide that a company which is registered under section 25 of the Companies Act, (i.e., a company having for its object the promotion of commerce, art, science, religion, charity or any other useful object and which prohibits payment of dividends to its members) will be regarded as a company in which the public are substantially interested without the application of the various tests as to the composition of the ownership of the shares in, and control over, the affairs of  the company. Further, in order to cover the cases of entities which are not registered as companies but are declared to be companies for tax purposes and to companies limited by guarantee which are not registered under section 25, the Central Board of Direct Taxes has been empowered to direct that any such entity or company shall be treated as a company in which the public are substantially interested. Such direction will be made by the Board having regard to the object of the company, the nature and composition of its membership and other relevant considerations. The Board is empowered to issue such direction even in respect of a past year and the direction will have effect for the assessment year or years specified therein.

 FINANCE (NO. 2) ACT, 1971

35. The amendment to clauses (17), (18 ) and (26) of section 2 explained  in paragraphs 29 to 34, have taken effect from 1-4-1971.

 FINANCE (NO. 2) ACT, 1971

Computation of a partner’s share in the income of a firm, and the tax payable by him, where an unregistered firm is assessed as a registered firm

36. A partnership firm enjoys a concessional tax treatment if it is "registered" for purposes of the Income-tax Act. While in the case of an unregistered firm, income-tax is payable on the total income of the firm at the progressive rates of tax applicable in the case of individual. Hindu undivided families, associations of persons, etc., a registered firm pays tax on its income at lower rates and the partners of the firm are chargeable to tax in respect of their shares in the profits of the firm. Under section 183(b) the Income-tax Officer is required to assess an unregistered firm as a registered firm and charge tax on the firm as well as its partners on that footing if such a course is more favourable to Revenue. Prior to the assessment year 1971-72, in a  case where an unregistered firm was treated as a registered firm, the firm was not chargeable to income-tax on its income at the rates applicable in the case of a registered firm but only the partners were required to pay tax on their shares in the profits of the firm. As a result of an amendment made in the relevant provision of the Income-tax Act through the Taxation Laws (Amendment) Act, 1970, this position has, however, been changed and with effect from the assessment year 1971-72, an unregistered firm which is assessed as a registered firm is chargeable to tax on its total income at the rates applicable in the case of registered firms and, further, the partners of such a firm are chargeable to tax in respect of their shares in the profits of the firm. In conformity with this change, the rate schedule of tax in the case of a registered firm, in Paragraph C of Part I and in Paragraph C of Part III of the First Schedule to the Finance (No. 2) Act, 1971 applies also to an unregistered firm assessed as a registered firm under section 183(b) [vide  paragraph 3 supra].

FINANCE (NO. 2) ACT, 1971

37. Under section 67, any interest, salary, commission or other remuneration paid by the firm to its partners is included in the total income of the firm, but in determining the shares of the individual partners in the income of the firm, these sums are excluded  from the firm’s total income. Further, where the firm is a registered firm, the tax, if any, payable by the firm on its total income is also deducted from its total income and the balance apportioned amongst the partners according to their profit-sharing ratios. The salary, interest, commission or other remuneration paid to a partner is then added to the amount falling to his share as aforesaid and the resultant amount is treated as his share in the income of the firm. This provision secures that the partner of a registered firm is not subjected to tax in respect of his share in the tax paid by the registered firm.

FINANCE (NO. 2) ACT, 1971

38. In the context of the change in section 183(b) explained in paragraph 36 above, section 67 relating to the computation of a partner’s share in the income of a firm, has been amended by section 13 of the Finance  (No. 2) Act, 1971 in order to provide that in computing the partner’s share in a case where an unregistered firm is assessed as a registered firm, the tax payable by the firm on its total income will be allowed as a deduction. This provision will place an unregistered firm which is assessed as a registered firm, and its partners, on a par with a registered firm and its partners in the matter of income-tax.

FINANCE (NO. 2) ACT, 1971

39. Under section 86(iii ), in the case of a partner in an unregistered firm, no income-tax is payable by him in respect of any portion of his share in the profits of the firm on which income-tax is payable by the firm. In the context of the change in the provisions of section 183(b ) and the provision in the Finance (No. 2) Act, 1971 for levy of tax on the total income of an unregistered firm assessed as a registered firm at the same rates as in the case of a registered firm, section 86(iii) has been amended by section 24 of the Finance (No. 2) Act, 1971 in order to make it clear that in the case of a partner of an unregistered firm which is treated as a registered firm, the partner will be liable to pay income-tax on his share in the profits of the firm.

FINANCE (NO. 2) ACT, 1971

40. The provisions set forth in paragraphs 36 to 39 have taken effect from 1-4-1971 and, accordingly, apply in relation to assessments for the assessment year 1971-72 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Withdrawal of tax relief to foreign companies and foreign nationals on capital gains in certain cases

41. Under section 54A, foreign companies or individuals of foreign citizenship holding investments in shares in Indian companies have been eligible for relief from the tax chargeable on capital gains arising to them on the sale of such shares if the sale proceeds are reinvested within a period of 2 years in certain approved investments. The investments approved for the purpose of this provision comprise Government securities (including certain small savings securities of the Central Government) and ordinary shares of certain categories of public companies engaged in specified industries. This provision was introduced in the law in 1965, with a view to conserving our foreign exchange resources by encouraging foreign enterprises and foreign nationals to retain in India the sale proceeds of their investments in shares in Indian companies instead of repatriating such sale proceeds outside India.

FINANCE (NO. 2) ACT, 1971

42. In actual practice the impact of this provision on our foreign exchange resources has been found to be minimal. There has also been a distinct improvement in our balance of payments position. In these circumstances, section 54A has been omitted by section 11 of the Finance (No. 2) Act, 1971 so as to withdraw the above tax relief with effect from 1-4-1972. Accordingly, from the assessment year 1972-73, foreign enterprises and foreign nationals will be chargeable to tax on the capital gains arising to them on the sale of shares held by them in Indian companies, regardless of whether the sale proceeds are invested in other assets in India or are repatriated outside India.

 FINANCE (NO. 2) ACT, 1971

Withdrawal of special tax concession to foreign companies in respect of certain inter-corporate dividends

43. Under the provisions of the Income-tax Act, inter-corporate dividends, i.e., dividends received by a company (whether Indian or foreign) on its holding of shares in domestic company, are subjected to tax on a concessional basis. This is brought about by allowing a deduction of a specified percentage of the dividends in computing the taxable income of the company receiving the dividends, and taxing the remainder at the rate of tax applicable to the ordinary income of the company. Under section 80M, before its amendment by the Finance (No. 2) Act, 1971, the deduction was :

   a.  in respect of dividends received by a domestic company from any other domestic company, 60 per cent of such dividends;

   b.  in respect of dividends received by a foreign company from a domestic company;

    i.  where the company paying the dividend is a closely-held Indian company mainly engaged in a priority industry, 80 per cent of the dividends;

   ii.  in any other case, 65 per cent of the dividends.

As a result of this deduction, the effective rate of tax on the dividends works out to 22 per cent [55 per cent of 40 per cent] in the case of a widely-held domestic company which is liable to tax on its income at the rate of 55 per cent; and 26 per cent [65 per cent of 40 per cent] in the case of a closely-held  domestic company, which is not an industrial company, where the rate of tax on the ordinary income is 65 per cent. In the case of a foreign company, the effective incidence of tax on dividends  received by it from a closely-held Indian company mainly engaged in a priority industry  worked out to 14 per cent [70 per cent of 20 per cent] and in respect of dividends received by it from any other domestic company, the effective rate of tax worked out to 24.5 per cent [70 per cent of 35 per cent].

FINANCE (NO. 2) ACT, 1971

44. The special concessional rate of 14 per cent in respect of dividends received by a foreign company from a closely-held Indian company mainly engaged in a priority industry was provided in the context of the higher rate of tax applicable to the ordinary income of a closely-held domestic company, which reduces the amount available for distribution of dividends. However, closely-held domestic companies which are engaged in industrial activities are now subjected to tax on the first Rs. 10 lakhs of their income at the same rate as is applicable to widely-held domestic companies, i.e., 55 per cent and even on the balance of the income, a closely-held domestic company engaged in industrial activities is subjected to tax at 60 per cent which is less than the rate of tax applicable to other closely-held domestic companies. Section 80M has, accordingly, been amended by section 18 of the Finance (No. 2) Act, 1971 so as to discontinue the special concessional treatment allowed to foreign companies in respect of dividends received by them on their investments in the shares of closely-held Indian companies engaged in priority industries. The quantum of the deduction in respect of such dividends in computing the taxable  income of the foreign company has been reduced from 80 per cent to 65 per cent so as to bring it in line with the quantum of the deduction allowed in respect of dividends received by a foreign company from domestic companies generally. As a result of this change, the effective incidence of tax on dividends received by a foreign company from any domestic company will, henceforth, be 24.5 per cent. This amendment will come into effect from 1-4-1972 and will, accordingly, apply for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Discontinuance of tax relief on dividends paid by a company out of its agricultural income

45. Section 235 before its amendment by the Finance (No. 2) Act, 1971, provided for the grant of relief to shareholders of a company on that part of the dividend on their shares which is attributable to the paying company’s agricultural income which has been subjected to agricultural income-tax under a State law. The quantum of the relief is the proportionate amount of the agricultural income-tax borne by the company on its profits, but limited to the amount of Central income-tax payable by the shareholder, on that part of the dividend which is attributable to the profits of the company assessed to agricultural income-tax. In the case of shareholder other than a company, the relief was further limited to an amount calculated at 27.5 per cent on that portion of the dividend which is attributable to the profits of the company assessed to agricultural income-tax.

FINANCE (NO. 2) ACT, 1971

46. The provisions referred to in the preceding paragraph was contrary to the concept underlying the present scheme of taxation of companies and their shareholders, under which no part of the Central income-tax borne by the company on its income is considered as having been paid on behalf of the shareholders. So far as the shareholder is concerned, the proximate source of the dividend is the investment in the shares and not the profits of the company. In these circumstances, it was anomalous to grant relief to shareholders in respect of the agricultural income-tax borne by a company  on its profits. The provision in section 235 has, accordingly, been omitted by section 28 of the Finance (No. 2) Act, 1971. This omission will take effect from 1-4-1972 and the relief will, therefore, cease to be available to shareholders from the assessment year 1972-73.

FINANCE (NO. 2) ACT, 1971

Exclusion of debentures and long-term borrowings from approved sources in computing the capital employed in a new industrial undertaking, ship or hotel, for the purpose of the 5-year tax holiday

47. Under the provisions of section 80J, the deduction under that section is allowed in respect of profits and gains derived from a new industrial undertaking or ship or the business of a hotel, up to an amount calculated at the rate of 6 per cent per annum on the capital employed in the industrial undertaking or ship  or hotel business, as the case may be, computed in the manner laid down in the Income-tax Rules. Rule 19A, before its recent amendment, provided, inter alia, for the inclusion, in the capital base of a new industrial undertaking or a hotel, all debentures (in the case of a company) and certain long-term  borrowings from approved sources (in the case of  all categories of taxpayers), for the purpose of the provision in section 80J. In the case of a ship too, rule 19A, in effect, provided for the inclusion of all borrowings in the capital base.

FINANCE (NO. 2) ACT, 1971

48. As the interest payable on debentures and long-term borrowings (in fact on all borrowings) is already allowed as a deduction in arriving at the profits on the industrial undertaking or hotel, the inclusion of such debentures and borrowings again in the capital base and exemption of profits up to 6 per cent of such capital base amounts to a double advantage besides creating a bias in favour of borrowed capital as against own capital. It was, accordingly, announced by the Finance Minister in paragraph 43 of his Budget speech for 1971-72 that debentures and long-term borrowings would be excluded from the capital base for the purpose of the tax holiday exemption. In pursuance of this announcement, rule 19A has been amended by the Income-tax (Third Amendment) Rules, 1971 [Notification (Income-tax) No. SO 2168, dated 28-5-1971].Under rule 19A, as amended by the said Notification, all borrowed moneys, whether  by way of debentures, long-term borrowings or otherwise, will be excluded in computing  the capital employed in a new industrial undertaking or ship or hotel. This amendment will come into force on 1-4-1972 and will, accordingly, apply in relation to the assessment year 1972-73 and subsequent years.

 MEASURES FOR ACHIEVING CERTAIN ECONOMIC OBJECTIVES

FINANCE (NO. 2) ACT, 1971

Local authorities deriving income from supply of water and electricity outside their jurisdictional areas

49. Under section 10(20 ), before its amendment by the Finance (No. 2) Act, 1971, a local authority was exempted from tax on its income under the head "Interest on securities", "Income from house property", "Capital gains" or "Income from other  sources", as also on its income from a trade or business carried on by it which accrues or arises from the supply of a commodity or service within its own jurisdictional area. Income derived by a local authority from the supply of a commodity or service outside its own territorial limits was, however, liable to tax. In order to encourage local authorities to supply drinking water and electricity to adjoining villages on an increasing scale, section 10(20) has been amended by section 4(a) of the Finance (No. 2) Act, 1971 in order to extend the scope of this exemption to cover income derived by a local authority from the supply of water or  electricity outside its own jurisdictional area. Accordingly, income derived by a local authority from the supply of water or electricity outside its territorial limits will also be exempt from income-tax. This provision will be effective from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Financial corporations providing long-term finance for agricultural development in India

50. Under section 36(1)( viii), financial corporations engaged in providing long-term finance for industrial development in India, are entitled to a deduction, in the computation of their taxable profits, of amounts transferred by them out of such profits to a special reserve account up to a specified percentage of their total income. Where the financial corporation has a paid-up share capital not exceeding Rs. 3 crores, the special reserve may be up to 25 per cent of the current profits, while in the case of a financial corporation having a paid-up share capital exceeding Rs. 3 crores, the special reserve may be up to 10 per cent of the current profits. This deduction is available only where the financial corporation is approved by the Central Government for this purpose. The objective underlying this provision is to enable financial  corporations to build up their internal resources at an accelerated pace and thus become independent of subventions from Government for financing their activities.

FINANCE (NO. 2) ACT, 1971

51. Certain financial corporations have recently been set up for the purpose of providing long-term finance for agricultural development in India. One such corporation is the Agricultural Refinance Corporation which has been   established under an Act of Parliament with a view to providing refinance  to co-operative and commercial banks for financing compact area schemes. Similarly, another corporation, called the Agricultural Finance Corporation which is registered as a company, has been established as a consortium of major commercial banks in the country. With a view to encouraging these and similar other financial corporations to build up their internal resources at a fast rate, section 36(1)(viii) has been amended by section 8 of the Finance (No. 2) Act, 1971 so as to extend to such corporations the same tax concession as has been available to financial corporations engaged in providing long-term finance for industrial development in India. Accordingly,  a financial corporation which is engaged in providing long-term finance for agricultural development in India will be entitled to a deduction, in the computation of its profits, of amounts carried to a special reserve account out of its current profits. The quantum of the deduction will be the same as under the existing provision, namely, up to 25 per cent of current profits in the case of a financial corporation having a paid-up capital not exceeding Rs. 3 crores, and up to 10 per cent of the current profits in any other case. The aggregate of the deductions on this account over a period of years will not, however, exceed the amount of the paid-up capital. The concession in these cases will also be subject to the requirement of approval of the corporation by the Central Government. The above provision will be effective from 1-4-1972 and will, accordingly, apply in relation to the assessments for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Royalties, commission, fees, etc., for provision of technical know-how or technical services to Indian concerns

52. Under section 80MM, an Indian company, deriving income by way of royalties, commission, fees, etc., from an Indian concern in consideration for the provision to the Indian concern of technical know-how or technical services, is entitled to a deduction of 40 per cent of the amount of such income in the computation of its taxable income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided is approved by the Central Government on an application made in this behalf before 1st October of the relevant assessment year. The objective of this provision is to encourage Indian companies to carry out research and development programmes and develop indigenous technical know-how.

FINANCE (NO. 2) ACT, 1971

53. Section 80MM has been amended by section 19 of the Finance (No. 2) Act, 1971 so as to extend this tax concession also to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers such as individuals, Hindu undivided families, partnership firms, etc. In order to avoid any possible abuse of the concession, it has been provided that the concession would be available only if the accounts of the resident non-corporate taxpayer (not being a co-operative society) for the relevant accounting year have been audited by a chartered accountant or any other accountant authorised in law to audit the accounts of companies and the taxpayer furnishes the report of such audit in a form to be prescribed in the Income-tax Rules along with his return of income.

FINANCE (NO. 2) ACT, 1971

54. In the context of the amendment of section 80MM to extend the deduction under that section to resident non-corporate taxpayers, section 80A has been amended by section 14 of the Finance (No. 2) Act, 1971 so as to secure that where the deduction  under section  80MM is granted to a firm, association of persons or body of individuals, no further deduction under that section will be granted to any partner of the firm or any member of the association or body in relation to his share in the income of the firm, association or body.

FINANCE (NO. 2) ACT, 1971

55. The existing requirement, under section 80MM, relating to approval by the Central Government of agreements under which the technical know-how or technical services are provided, has, in actual practice, led to certain avoidable difficulties to taxpayers. The power of granting approval, for the purpose of the tax concession, has, accordingly, been vested in the Central Board of Direct Taxes.

FINANCE (NO. 2) ACT, 1971

56. The amendments to section 80MM take effect from 1-4-1972 and will, accordingly, apply to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been provided that the approval of the Board will not be necessary in the case of agreements which are approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the applications for such approval pending with the Central Government immediately before that date will stand transferred to the Board for disposal.

 FINANCE (NO. 2) ACT, 1971

Dividends on shares in a foreign company allotted in consideration of the provision of technical know-how or technical services

57. Under section 80N, an Indian company deriving income by way of dividends on shares allotted to it in a foreign company in consideration of the provision of technical know-how or technical services to such foreign company is exempted from tax in India on the whole of such dividend income. This tax concession is available only if the agreement under which the technical know-how or technical services are provided to the foreign company is approved by the Central Government before 1st October of the relevant assessment year. The objective of this provision is to  encourage Indian companies to develop technical know-how and make it available to foreign companies so as to augment our foreign exchange resources and establish a reputation for Indian technical know-how in foreign countries.

FINANCE (NO. 2) ACT, 1971

58. Under section 80N, before its amendment, the tax concession was available only in a case where the technical know-how or technical services were provided to a foreign company by an Indian company and the shares in the foreign company were allotted to it in consideration thereof. Where, however, the shares are allotted to any resident non-corporate taxpayer, the dividend income does not enjoy exemption from tax in his hands. Section 80N has, accordingly, been amended by section 20 of the Finance (No. 2) Act, 1971 so as to extend its operation to resident non-corporate taxpayer as well. Dividend income received on shares allotted to a resident non-corporate taxpayer in a foreign company in consideration of the provision of technical know-how or technical services to such foreign company will, henceforth, be exempt from tax. Further, the power to accord approval to agreements under which the technical know-how or technical services are provided has been vested in the Central Board of Direct Taxes, instead of the Central Government. The requirement that the approval of the agreement should be obtained before 1st October of the relevant assessment year has also been replaced by the requirement that the application for the grant of such approval should be made before that date. The date on which the approval is actually granted will,  therefore, no longer be material in cases where the applications for such approval are made within the time allowed for the purpose.

FINANCE (NO. 2) ACT, 1971

59. The new provisions will be operative from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose by the Central Government before 1-4-1972 and that the applications pending with the Central Government on that date will stand transferred to the Board for disposal. The amendment of section 80A, as explained in paragraph 54, will apply also in relation to the deduction  under section  80N.

 FINANCE (NO. 2) ACT, 1971

Royalties, commission, fees, etc., for provision of technical know-how or technical services to foreign enterprises

60. Under section 80-O, an Indian company deriving income by way of royalties, commission, fees etc., from a foreign company, in consideration of the provision to the foreign company of technical know-how or technical services is exempted from taxation in India on the whole of such income. This tax concession is available only if the agreement under which the technical know-how or  technical services are provided is approved by the Central Government before 1st October of  the relevant assessment year. The objective of this provision is to encourage Indian companies to develop technical know-how and make it available to foreign companies so as to augment our foreign exchange earnings and establish a reputation for Indian technical know-how in foreign countries.

FINANCE (NO. 2) ACT, 1971

61. Under section 80-O, prior to its amendment by the Finance (No. 2) Act, 1971, the tax concession was available only where the foreign concern to which the technical know-how or technical services were provided was a "company" and was declared as such by an order of the Board under the relevant provision of the Income-tax Act. It has been found that Indian concerns have been providing technical know-how not only to foreign companies but also to foreign Governments, public utilities, etc. Although, in these cases, the supply of technical know-how to foreign enterprise results in the export of Indian technical know-how and adds to the foreign exchange earnings, the Indian company which undertook this work was not entitled to the tax concession. Further, the tax concession was not available where the technical know-how or services were provided by a non-corporate taxpayer.

FINANCE (NO. 2) ACT, 1971

62. Section 80-O has been amended by section 21 of the Finance (No. 2) Act, 1971 so as to extend this tax concession also to cover cases where technical know-how or technical services are provided by resident non-corporate taxpayers, such as individuals, Hindu undivided families, partnership firms, etc., and to make this concession available in all cases where the technical know-how or technical services are provided to a foreign Government or a foreign enterprise, regardless of whether the foreign enterprise is a corporate body or not. In order, however, to avoid any possible abuse of the concession, it has been provided that in the case of resident non-corporate taxpayers (other than co-operative societies), the concession would be available only if the accounts of the taxpayer, for the relevant accounting year have been audited by a chartered accountant or any other accountant authorised in law to audit the accounts of companies and a report of such audit in a form to be prescribed for this purpose is furnished along with the return of income.

FINANCE (NO. 2) ACT, 1971

63. In order to remove certain practical difficulties in the operation of the provision in section 80-O, the power to accord approval to the agreement under which the technical know-how or technical services are provided has been vested in the Central Board of Direct Taxes instead of the Central Government. Further, the requirement that the approval to the agreement should be obtained before 1st October of the relevant assessment year has been replaced by the requirement that the application for the grant of such approval should be made to the Board before that date. The date on which the approval is actually granted will, therefore, no longer be material if the relevant application is made within the time allowed.

FINANCE (NO. 2) ACT, 1971

64. The amended provisions of section 80-O will be operative from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years. As a transitional measure, it has been specifically provided that the approval of the Board will not be necessary in a case where the agreement under which the technical know-how or technical services are provided is approved for the purpose of the tax concession by the Central Government before 1-4-1972 and that the applications pending with the Central Government immediately before that date will stand transferred to the Board for disposal. The amendment of section 80A, as explained in paragraph 54, will apply also in relation to the deduction  under section  80-O.

 MEASURES FOR STREAMLINING OF RECOVERY WORK

FINANCE (NO. 2) ACT, 1971

Tax Recovery Commissioners

65. The Second Schedule to the Income-tax Act contains a self-contained code for recovery of taxes and other dues under that Act. Where a taxpayer is in default in payment of tax, the Income-tax Officer forwards to the "Tax Recovery Officer" a certificate specifying the amount of arrears due from the taxpayer and thereupon the Tax Recovery Officer proceeds to recover from the defaulter the amount specified therein by one or more of the modes mentioned below:

   a.  attachment and sale of the defaulter’s movable property ;

   b.  attachment and sale of the defaulter’s immovable property ;

    c.  arrest of the defaulter and his detention in prison;

   d.  appointment of a receiver for the management of the defaulter’s movable and immovable properties.

For this purpose, "Tax Recovery Officer" has been defined in the Income-tax Act to mean : (i) a Collector or an Additional Collector ; (ii) any officer of a State Government who exercises powers to effect recovery of arrears of land revenue, etc., under the relevant State law, if such officer is authorised to exercise the powers of a Tax Recovery Officer; and (iii) any gazetted officer of the Central or State Government authorised by the Central Government to exercise the powers of a Tax Recovery Officer. Although the existing definition includes the State Government Officers referred to above, in actual practice, the work of tax recovery has already been taken over by gazetted officers of the Central Government, who are generally Income-tax Officers, and the present position is that, except in relation to a few districts, the work has entirely been taken over by the Income-tax Department.

FINANCE (NO. 2) ACT, 1971

66. In the course of effecting recoveries of taxes, the Tax Recovery Officer is required to pass various orders relating to attachment and sale of properties, appointment of receivers, etc. At present, the appeals against such orders lie to certain State Government officials. Where the Tax Recovery Officer is a Collector or an Additional Collector or a gazetted officer of the Central or State Government, including an Income-tax Officer, who is authorised by the Central Government to exercise the functions as such, the appeal generally lies to the Revenue  Commissioner having jurisdiction over the district concerned. Where, however, the Tax Recovery Officer is a State Government officer other than a Collector or an Additional Collector, the appeal lies to the revenue authority to which an appeal or application for revision would ordinarily lie if the order passed by the officer were an order under the law relating to land revenue or other public demands of the State concerned. In practical terms, this means that where the Tax Recovery Officer is a Tehsildar or a Mamlatdar, an appeal against his order in certain States lies to the Collector of the district.

 FINANCE (NO. 2) ACT, 1971

67. In view of the position that the tax recovery work has been taken over practically in its entirety by officers of the Income-tax Department, the rules in the Second Schedule have been amended by section 29 of the Finance (No. 2) Act, 1971 in order to provide that an appeal from an original order passed by a Tax Recovery Officer, not being an order which is conclusive, would lie to a senior officer of the Income-tax Department who would be designated as the Tax Recovery  Commissioner. Provision has been made in a new clause (43B) of section 2 by section 3(d) of the Finance (No. 2) Act, 1971, to define the Tax Recovery Commissioner as a Commissioner or an Assistant Commissioner of Income-tax who may be authorised by the Central Government, by general or special notification in the Official Gazette, to exercise the powers of a Tax Recovery Commissioner. Under the amendments to the Second Schedule by section 29 of the Finance (No. 2) Act, 1971, an appeal from an original order passed by a Tax Recovery Officer [being any gazetted officer of the Central Government or State Government who has been authorised by the Central Government  under section  2(44)( iii) to exercise the power of a Tax Recovery Officer under the Second Schedule] will hereafter lie to the Tax Recovery Commissioner instead of the revenue authority to which appeals ordinarily lie against the orders of a Collector under the law relating to land revenue of the State concerned. Appeals against the orders passed before the date of appointment of a Tax Recovery Commissioner in respect of any area by any Tax Recovery Officer (including State Revenue Officers) will also lie to the Tax Recovery Commissioner and not to the appellate authority of the State Government. Further, as a transitional measure, it has been provided that the appeals pending with the State Government authorities on the date of appointment of a Tax Recovery  Commissioner, in respect of any area wherein the work of recovery of tax has been taken over by Tax Recovery Officers of the Central Government, will stand transferred to the Tax Recovery Commissioner exercising jurisdiction over that area.

FINANCE (NO. 2) ACT, 1971

68. Apart from attending to the appellate work, the Tax Recovery Commissioners will be placed in overall administrative charge of tax recovery work in their respective jurisdictions. Further, in order to enable the Tax  Recovery Commissioners to perform their functions effectively, certain ancillary provisions have been made in the Second Schedule. These ancillary provisions are as follows:

1. Tax Recovery Commissioners will, in the discharge of their functions, be deemed to be acting judicially within the meaning of the Judicial Officers’ Protection Act, 1850 [vide rule 82 of the Second Schedule].

2. Every Tax Recovery Commissioner shall have the powers of a civil court while trying a suit for the purpose of receiving evidence, administering oaths, enforcing attendance of witnesses and compelling production of documents [vide rule 83 of the Second Schedule].

3. Tax Recovery Commissioners will have the power to review the orders passed by them under the Second Schedule for the purpose of rectifying any mistake apparent from the record [vide rule 87 of the Second Schedule].

FINANCE (NO. 2) ACT, 1971

69. The power of the Board to make rules for regulating the procedure to be followed by Tax Recovery Officers, etc., has been enlarged in order to enable the Board to make rules for regulating the procedure to be followed by Tax Recovery Commissioners and to define the areas within which Tax Recovery  Commissioners may exercise jurisdiction [vide rule 92 of the Second Schedule].

FINANCE (NO. 2) ACT, 1971

70. The amendments set forth in paragraphs 67 to 69 will take effect from 1-1-1972.

 FINANCE (NO. 2) ACT, 1971

Bar on registration of transfer of immovable property in a case where taxation liabilities remain unsatisfied

71. Section 230A, before its amendment by the Finance (No. 2) Act, 1971, provided that a document of transfer of immovable property (other than agricultural land) valued at more than Rs. 50,000 shall not be registered unless a certificate is obtained from the Income-tax Officer to the effect that the transferor has paid, or made satisfactory provision for payment of, all existing tax liabilities under the Income-tax Act, Wealth-tax Act, Gift-tax Act and other direct taxes laws, or that the registration of the document will not prejudicially affect the recovery of any such liability. With a view to making this provision more effective in achieving the purpose for which it is intended and removing certain practical difficulties in its operation, section 230A has been amended by section 27 of the Finance (No. 2) Act, 1971 making certain modifications therein as explained below :

1. The scope of the section has been enlarged to cover transfers of agricultural land valued at more than Rs. 50,000.

[Agricultural land is liable to wealth-tax and transfers of agricultural land are liable to gift-tax. Capital gains arising from transfer of agricultural land situated in urban areas are liable to income-tax. Apart from these considerations agricultural land is liable to be attached and sold for recovery of income-tax arrears. Hence, transfers of agricultural land have been brought within the scope of the restriction on registration in cases where taxation liabilities remain unsatisfied.]

2. The provision has been extended to cover existing liabilities under the Companies (Profits) , 1964 as also the Super Profits Tax Act, 1963 which preceded it.

3.  The Central Board of Direct Taxes has been empowered to exempt, by notification in the Official Gazette, any institution, association or body or any class of institutions, associations or bodies from the requirement of obtaining a tax clearance certificate under this provision.

[This power has been conferred on the Board so as to obviate practical difficulties in the case of institutions such as, banks, Life Insurance Corporation, etc., which advance moneys in a large number of cases on the mortgage of immovable property and have to release the property from the mortgage when the debt has been discharged by the borrower. The requirement of a tax clearance certificate in such cases throws an avoidable administrative burden on the institutions concerned and also on the Income-tax Department, without any significant advantage to the Revenue. Under the new provision, the Board will be required to record the reasons for exempting any institution, etc., from the requirement of obtaining a tax clearance certificate.]

FINANCE (NO. 2) ACT, 1971

72. The amendments to section 230A take effect from 1-10-1971.

 MEASURES FOR GRANTING TAX RELIEF AND REMOVING
CERTAIN ANOMALIES AND PRACTICAL DIFFICULTIES

FINANCE (NO. 2) ACT, 1971

Capital gains derived by charitable and religious trusts

73. Under section 11, income derived from property held under trust for charitable or religious purposes is exempt from income-tax to the extent such income is actually applied to such purposes during the previous year itself or within three months next following. As "income" includes "capital gains", a charitable or religious trust would forfeit exemption from income-tax in respect of its income by way of capital gains unless such income is also applied to the purposes of the trust during the stipulated period. In some cases, charitable or religious trusts are required to sell, in the interest of the trust, capital assets forming part of the corpus of the trust property solely with a view to acquiring other capital assets to be held as part of the corpus of trust. The requirement that the capital gains arising from such transactions should be utilised for charitable or religious purposes, during the accounting year itself or within three months immediately following, has the unintended effect of progressively reducing the corpus of the trust and the income yielded by it.

FINANCE (NO. 2) ACT, 1971

74. This difficulty has been accentuated as a result of certain amendments made in the scheme of tax exemption of charitable and religious trusts through the Finance Act, 1970. Under one of these amendments, a charitable or religious trust would forfeit exemption from tax on its income if the trust funds, constituting its corpus or income, are invested in a concern in which the author or founder of the trust or any substantial contributor to it or any relative of such author, founder or contributor is substantially interested. Where the investment of the trust funds in such concern exceeds 5 per cent of the capital of the concern, exemption is forfeited in respect of the whole of the income of the trust, while in a case where the investment does not exceed 5 per cent, the exemption is lost only in respect of the income from such investment, the other income continuing to enjoy tax exemption. In order to enable charitable and religious trusts to change their investments suitably, without forfeiting exemption from tax, a specific provision was also made in the Income-tax Act to the effect that the aforesaid provisions would not apply in a case where the investment of the trust funds in the prohibited concerns does not continue after 31-12-1970. In order to avail of the benefit of this relaxation, many charitable or religious trusts divested themselves of investments in prohibited concerns before 1-1-1971. If the provisions of the law were construed strictly, such trusts would have forfeited exemption from tax in respect of their income by way of capital gains arising from the transfer of such investments unless they applied such incomes to charitable or religious purposes during the relevant accounting year or within three months immediately following.

FINANCE (NO. 2) ACT, 1971

75. The question of eliminating the disadvantage to charitable or religious trusts in being obliged to spend away the capital gains arising from the transfer of assets constituting the corpus of the trust instead of adding to the corpus, was considered by Government in 1963 and administrative instructions were issued to the effect that where a charitable or religious trust transferred a capital asset forming part of the corpus of its property solely with a view to acquiring another capital asset for the use and benefit of the trust and utilised the capital gains arising from the transaction in acquiring a new capital asset, the amount of capital gains so utilised should be regarded as having been applied to the charitable or religious purposes of the trust. These instructions have recently been reiterated.

FINANCE (NO. 2) ACT, 1971

76. With a view to placing the aforesaid administrative instructions on a legal footing and removing the disadvantage to charitable and religious trusts for the past as also the future, section 11 has been amended, by section 5 of the Finance (No. 2) Act, 1971 by way of insertion of a new sub-section (1A). Under the new sub-section, it has been provided that in a case where a capital asset being property held under trust for charitable or religious purposes is transferred and the whole or any part of the net consideration for the transfer (i.e., full value of the consideration as reduced by the expenditure incurred wholly and exclusively in connection with the transfer) is utilised for acquiring another capital asset to be held as part of the corpus of the trust, the capital gain arising from the transfer will be regarded as having been applied to charitable or religious purposes. Where the whole of such net consideration is utilised in acquiring the new capital asset, the entire amount of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, an amount, if any, by which the cost of acquisition of the new asset exceeds the aggregate of the cost of acquisition of the capital asset transferred and the cost of any improvements made to such asset, will be regarded as having been applied to such purposes.

FINANCE (NO. 2) ACT, 1971

77. In a case where the asset which is transferred formed part of property held under trust in part only for charitable or religious purposes, a proportionate amount of the capital gain will be regarded as having been applied to charitable or religious purposes. Thus, where the whole of the net consideration received as a result of the transfer is utilised in acquiring the new capital asset, the whole of the "appropriate fraction" of the capital gain will be regarded as having been applied to charitable or religious purposes, while in a case where only a part of the net consideration is utilised for acquiring the new capital asset, so much of the "appropriate fraction" of the capital gain as is equal to the amount, if any, by which the "appropriate fraction" of the amount utilised for acquiring the new asset exceeds the "appropriate fraction’ of the cost of the transferred asset will be regarded as having been applied to such purposes. The "appropriate fraction" in this context means the fraction obtained by dividing the amount of the income which, under the terms of the trust, is applicable to charitable or religious purposes, by the whole of the income derived from property held under trust in part only for such purposes.

FINANCE (NO. 2) ACT, 1971

78. The insertion of new sub-section (1A) in section 11 takes effect retrospectively from 1-4-1962, i.e., the date of commencement of the Income-tax Act and, therefore, places the concession already allowed under executive orders on a legal footing right from the date from which the requirement of application, by charitable or religious trusts, of at least 75 per cent of their income to charitable or religious purposes during the year of accrual of such income was introduced in the income-tax law.

 FINANCE (NO. 2) ACT, 1971

Forfeiture of exemption from income-tax on the income of charitable or religious trusts in certain cases

79. The Finance Act, 1970 made certain amendments in the scheme of tax exemption of charitable and religious trusts, inter alia, to curb the use of the funds of such trust to acquire control over industry and business. Under  the provision in section 13(2)(h), a charitable or religious trust forfeits exemption from tax, if any, of the funds of the trust are, or continue to remain, invested for any period during the previous year in any concern in which the author, founder or contributor has a substantial interest. Since the expression "funds of the trust" is wide enough to include not only the uninvested cash but also shares, stocks, securities, etc., forming part of its corpus, and, in fact, property of every kind belonging to the trust, it follows that a trust will forfeit exemption from tax if it continues to hold any shares in a company in which its author or other connected persons are substantially interested, regardless of whether the shares formed part of the original corpus of the trust or were subsequently acquired by it. Under another provision, in section 13(4), it was provided that in a case where the investment of the funds of the trust in a concern in which the author of the trust or other connected persons had a substantial interest does not exceed 5 per cent of the capital of the concern, the exemption from tax would be denied only in relation to the income arising from such investment and the remaining income will continue to enjoy exemption from tax.

FINANCE (NO. 2) ACT, 1971

80. The relevant provision in section 13(4) before its amendment by the Finance (No. 2) Act, 1971, however, referred, in one place, to "the moneys of the trust" instead of to "the funds of the trust" and this verbal variation in the phraseology used within section 13(4) itself, and between section 13(2)(h) and section 13(4), was likely to create unintended hardship in certain cases. This is because in a case where the shares in the prohibited concern form part of the corpus of the trust or have been donated to it in kind, it could be argued that since the shares were not paid for by the trust in cash, no "moneys of the trust" had been invested in the prohibited concern and as such the saving provision in section 13(4) would not apply and that the trust would lose exemption from tax in respect of its entire income and not merely in respect of income from such investment alone, even if the trust investment in the prohibited concern did not exceed 5 per cent of the capital of the concern. Such an interpretation would not have been in keeping with the intention underlying the provision.

FINANCE (NO. 2) ACT, 1971

81. Section 13(4) has, accordingly, been amended by section 6 of the Finance (No. 2) Act, 1971 in order to clarify that in a case where the investment made by a charitable or religious trust in a concern in which the author of the trust or his relatives, etc., have a substantial interest does not exceed 5 per cent of the capital of the concern (whether the investment is made by the trustees themselves or it forms part of the original corpus settled on trust or represents a donation made to it in kind), the trust will forfeit the exemption from tax only in relation to the income arising from such investment and its remaining income will continue to be eligible for exemption from tax. This amendment has been made effective retrospectively from 1-4-1971, i.e., the date from which section 13 was substituted by a new section, and will, accordingly, apply in relation to assessments for the assessment year 1971-72 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Deduction for expenses on travelling to salaried taxpayers

82. Under section 16(iv ), a salaried taxpayer owning a motor car, or a motor cycle, scooter or other moped and using it for the purposes of his employment, and also one who does not own any such conveyance but uses the public transport system for travelling for the purpose of employment, is entitled to standard deduction from his salary income to cover the expenditure incurred by him on such travelling, including maintenance of the conveyance and its wear and tear. For the assessment year 1971-72, the standard deduction for a motor car is Rs. 200 per month and for a motor cycle, scooter or other moped, it is Rs. 60 per month. In the case of salary taxpayers who do not own a conveyance of the types  referred to above, e.g., employees owning cycles or using the public transport system for travelling for the purposes of employment, the standard deduction is allowed in an amount of Rs. 35 per month.

FINANCE (NO. 2) ACT, 1971

83. Under an amendment of section 16(iv) by section 7 of the Finance (No. 2) Act, 1971, the standard deduction for employees owning a motor cycle, scooter or other moped, has been increased from Rs. 60 per month to Rs. 75 per month, and in the case of employees not maintaining a motor car or motor cycle, scooter or other moped, it has been increased from Rs. 35 to Rs. 50 per month. The  standard deduction in the case of employees owning a motor car continues to remain at the level of Rs. 200 per month.

FINANCE (NO. 2) ACT, 1971

84. These increases in the standard deduction are operative from 1-4-1972 and will, accordingly, apply for assessments for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Labour co-operative societies and fisheries co-operative societies

85. Under the Income-tax Act, co-operative societies enjoy certain tax concessions in respect of their income. Co-operative societies connected with agriculture, banking, rural credit, milk production and cottage industries enjoy complete exemption from tax in respect of their business income from these activities, while co-operative societies engaged in other activities are liable to tax on their business income in excess of Rs. 20,000. Further, the income of all co-operative societies by way of interest or dividends received from investments with other co-operative societies is wholly exempt from income-tax, and in the case of certain co-operative societies having a gross income  not exceeding Rs. 20,000, income by way of interest on securities or income from house property also enjoys complete exemption from income-tax.

FINANCE (NO. 2) ACT, 1971

86. With a view to promoting self-help among persons of small means who form co-operative societies for the collective disposal of their labour, or for fishing and allied activities, section 80P has been amended by section 22 of the Finance (No. 2) Act, 1971 so as to exempt from tax the business income of labour co-operative societies and also co-operative societies engaged in fishing and other allied pursuits e.g., catching, curing, processing, preserving, storing and marketing of fish, or the purchase of materials and equipment in connection therewith for the purpose of supplying them to their members. In order, however, to prevent any possible misuse of the tax concession by those for whom it is not intended, it has been provided, that the tax concession will be available only in the case of such of these co-operative societies as, under their  rules and bye-laws, restrict the voting rights to members who constitute the labour force or actually carry on the fishing or other allied activities, the State Government and the co-operative credit societies that provide financial assistance to them.

FINANCE (NO. 2) ACT, 1971

87. These provisions will take effect from 1-4-1972 and will, accordingly, apply in relation to assessments for the assessment year 1972-73 and subsequent years.

 FINANCE (NO. 2) ACT, 1971

Interest on deposits made by members with co-operative societies

88. Under section 194A, taxpayers other than individuals and Hindu undivided families are required to deduct income-tax at source from interest (other than "interest on securities") credited or paid by them to persons resident in India where any single payment exceeds Rs. 400. This provision does not, however, apply in the case of interest paid by banking companies and co-operative banks (including co-operative land mortgage banks and co-operative land development banks) or interest paid by co-operative societies to other co-operative societies or interest on deposits made under certain schemes approved by the Central Government. As mentioned in paragraph 13, deposits with a co-operative society made by a member of the society have been included in the categories of financial assets, income from which enjoys exemption from income-tax up to Rs. 3,000 under section 80L. In the context of this change, section 194A has  been amended by section 26 of the Finance (No. 2) Act, 1971 so as to provide that income-tax will not be deductible at source from interest paid on deposits with a co-operative society made by a member of the society. This amendment is effective from 1-4-1971.

 FINANCE (NO. 2) ACT, 1971

Exemption from tax of certain incomes of the residents of Ladakh

89. Under section 10(26A ), before its amendment by the Finance (No. 2) Act, 1971, income accruing or arising to any resident of Ladakh district from any source in that district or outside India was completely exempt from income-tax up to and including the assessment year 1969-70. The exemption was available only in the case of persons, other than Government servants, who were resident in Ladakh district in the previous year relevant to the assessment year 1962-63. This concession was allowed in view of the position that the residents of Ladakh had suffered hardship and their trade had been adversely affected as a result of the Chinese aggression and it was necessary to allow them time to rehabilitate themselves. The strategic importance of the area was also kept in view in this connection. Since these considerations continue to be valid, the  exemption from tax which was  available in such cases up to and including the assessment year 1969-70 has been revived for a further period of five years, i.e., for the assessment years 1970-71 to 1974-75, by the amendment of section 10(26A) under section 4(b) of the Finance (No. 2) Act, 1971.

FINANCE (NO. 2) ACT, 1971

90. The provision in section 10(26A) was not applicable to Government servants. Under another provision, viz., that in  section 10(26) members of Scheduled Tribes residing in specified areas in the north-eastern part of India are exempt from tax in respect of income arising to them in such areas and  also in respect of income by way of dividends or interest on securities, whether arising within or outside such areas. Originally, this provision was not applicable in the case of Government servants. The exclusion of Government servants from the purview of the exemption was, however, held by the Supreme Court to be unconstitutional and, accordingly, the provision has since been modified through the Taxation Laws (Amendment) Act, 1970, so as to extend the tax concession to Government servants as well. For similar reasons, the tax concession available in the case of the generality of taxpayers in Ladakh district, has now been extended to Government servants who were resident there during 1961-62. This has been done with retrospective effect from the assessment year 1962-63. [The scope of the amendment has been explained in detail in Board’s Circular No. 67, dated 23-9-1971.]