Circular No. 516-Income Tax Dated 15-6-1988

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DIRECT TAX LAWS (AMENDMENT) ACT, 1987-I

[as amended by Direct Tax Laws (Amendment) Act, 1989]

Amendments at a glance

Section/Schedule	Particulars
40(b), 64(1), 67, 75 to 77,	Provisions relating to assessment of partnership firms 2-3
86(iii), 182 to 187
3	Introduction of financial year as the uniform previous year 4
194A/194E	Provisions of the new section 194E relating to deduction of tax at source from interest and salary, etc., paid by a firm to the partners and also consequent amendment of section 194A 5
211	New advance tax scheme 6

CIRCULAR NO. 516, DATED 15-6-1988

Explanatory Notes

Direct Tax Laws (Amendment) Act, 1987-I

Provisions relating to assessment of partnership firms – Clarification regarding

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

Direct Tax Laws (Amendment) Act, 1987-I

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

Direct Tax Laws (Amendment) Act, 1987-I

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

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

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

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

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

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

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

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

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

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

Direct Tax Laws (Amendment) Act, 1987-I

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

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

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

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

Direct Tax Laws (Amendment) Act, 1987-I

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

Direct Tax Laws (Amendment) Act, 1987-I

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

1st instalment of not less than 20 per cent of advance tax payable	…	By 15th September, 1988.
2nd instalment of not less than 30 per cent of advance tax payable	…	By 15th December, 1988.
3rd instalment of the balance 50 per cent of the advance tax payable	…	By 15th March, 1989.

Amendments at a glance*

Section/Schedule	Particulars
	INCOME-TAX ACT
2(3), 2(7A), 2(9A),	Change in designation of income-tax authorities 6
2(15A), 2(16),
2(19A), 2(19B),
2(21), 2(25), 2(27),
2(28), 116, 117,
118
119, 120, 121,	Appointment, control and jurisdiction of income-tax
121A, 122,123,	authorities 7
124, 125, 125A,
126, 127, 128,
130, 130A
10(23D), 80L	Tax incentives to mutual funds set up by banks, etc. 8
(1)(va)	Deduction of tax at source from interest and salaries,
194A, 194E	etc., paid by a firm to its partners 9.2, 9.3
196 and 196A	Non-deduction of tax at source from payments made to a mutual fund or from payments made by a Mutual Fund to its unit-holders 9.4, 9.5, 9.6
207, 208	Substitution of new sections 207 & 208 relating to liability for payment of advance tax 10.2, 10.3
209, 209A and 212	Method of computation of advance tax 10.4 to 10.7
210	Substitution of new section 210 relating to payment of advance tax by the assessee of his own accord or in pursuance of an order of Assessing Officer 10.8, 10.9
211	Substitution of new section 211 relating to instalments of advance tax 10.10, 10.11
213	Omission of section 213 containing special provisions relating to commission receipts 10.12
218	Substitution of new section 218 relating to where assessee deemed to be in default 10.13
298(3)	Power to remove difficulties in giving effect to the provisions of the Income-tax Act, as amended by the Amending Act, 1987 11
	Issue of the Income-tax (Removal of Difficulties) Order, 1989
2(37A), 2(44),	Consequential amendments 12.1
132(1), proviso
and (1A), 132A
(1), 279(3)
	Wealth-tax Act
2(a), 2(ca), 2(g),	Amendments to the provisions of the Wealth-tax Act
2(gg), 2(hb), 2(k),	in order to bring its provisions relating to designation,
2(l), 2(la), 2(s),	appointment, control and jurisdiction of authorities,
5(1) (xxiva), 8,	tax incentives to mutual funds and power of the
8A, 8AA, 8B, 9,	Central Government to remove difficulties, broadly
9A, 10, 10A, 11,	in line with the corresponding amendments made
11A, 11AA, 12,	to the provisions in the Income-tax Act 14,15
13, 32, 37A, 37B,
45(j), 47
	GIFT-TAX ACT
2(i), 2(iiia), 2(vi),	Amendments to the provisions of the Gift-tax Act
2(via), 2(viia),	in order to bring its provisions relating to designa-
2(xiii), 2(xv),	tion, appointment, control and jurisdiction of
2(xvi), 2(xvia),	authorities, and power of the Central Government
2(xvii), 2(xxv) 7,	to remove difficulties, broadly in line with the corres-
7A, 7AA, 7B, 8,	ponding provisions in the Income-tax and Wealth-
8A, 9, 9A, 10, 11,	tax Acts 16,17
11A, 11AA, 11B,
12, 33, 47
	COMPANIES (PROFITS) SURTAX ACT
3, 18	Amendments to the provisions of the Companies (Profits) Surtax Act in order to bring its provisions relating to designations, appointments, control, and jurisdiction of authorities, broadly in line with the corresponding provisions in the Income-tax Act 18

AMENDMENTS TO THE INCOME-TAX ACT, 1961

CHANGE IN DESIGNATION OF INCOME-TAX AUTHORITIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 116 relating to income-tax authorities

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

	Earlier designation	Corresponding new designation
(i)	Director of Inspection	Director of Income-tax
(ii)	Deputy Director of Inspection	Deputy Director of Income-tax
(iii)	Assistant Director of Inspection	Assistant Director of Income-tax
(iv)	Inspecting Assistant Commissioner of Income-tax	Deputy Commissioner of Income
		tax
(v)	Appellate Assistant Commissioner of Income-tax	Deputy Commissioner of Income- tax (Appeals)
(vi)	Income-tax Officer Group �A�	Assistant Commissioner.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

APPOINTMENT, CONTROL AND JURISDICTION OF
INCOME-TAX AUTHORITIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Instructions to subordinate authorities (section 119)

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Jurisdiction of income-tax authorities (section 120)

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

(i)	Section 120	:	Jurisdiction of Directors of Inspection.
(ii)	Section 121	:	Jurisdiction of Commissioners.
(iii)	Section 121A	:	Jurisdiction of Commissioners (Appeals).
(iv)	Section 122	:	Jurisdiction of Appellate Assistant Commissioners.
(v)	Section 123	:	Jurisdiction of Inspecting Assistant Commissioners.
(vi)	Section 124	:	Jurisdiction of Income-tax Officers.
(vii)	Section 128	:	Functions of Inspectors of Income-tax.

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Jurisdiction of Assessing Officers (section 124)

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Power to transfer cases [section 127]

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

Notes :

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

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

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

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

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

DEDUCTION OF TAX AT SOURCE IN RESPECT
OF CERTAIN INCOMES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

ADVANCE PAYMENT OF TAX

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

(iv) Rs. 18,000 in any other case.

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Method of computation of advance tax (section 209)

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Substitution of new section 211 relating to instalments of advance tax

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Omission of section 213 containing special provisions relating to commission receipts

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

Notes :

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

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

[Section 35 of the Amending Act, 1989]

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

POWER of THE CENTRAL GOVERNMENT TO
REMOVE DIFFICULTIES

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

[Section 123 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

Consequential amendments

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

Sl. No.	Subject	Section of the Income tax Act	Section of the Amending Act, 1987/ Finance Act, 1988/ Amending Act, 1989
1	2	3	4
1.	Definition of the term �rate or rates in force�	2(37A)	(i) 3(o) of the Amending Act, 1987.
			(ii) 2(c) of the Amending Act, 1989.
2.	Definition of the term �Tax Recovery Officer�	2(44)	(i) 3(r) of the Amending Act, 1987.
			(ii) 95(a)(2) of the Amending Act, 1989.
3.	Amendments to section 132 relating to search & seizure pur-suant to change in designation of income-tax authorities	132(1), proviso and 132(1A)	(i) 37(a) and (b) of the Amending Act, 1987. (ii) 88(b) of the Finance Act, 1988.
4.	Amendments to section 132A relating to powers to requisition books of accounts, etc., pursuant to change in designation of income-tax authorities	132A(1)	(i) 38 of the Amending Act, 1987. (ii) 88(c) of the Finance Act, 1988.
5.	Amendments to section 279 relating to the authority competent to sanction prosecution, pursuant to change in designation of income-tax authorities.	279(3)	126(25) of the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-II

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

AMENDMENTS TO THE WEALTH-TAX ACT, 1957

Direct Tax Laws (Amendment) Act, 1987-II

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

Sl. No.	Section of the Amending Act1987/Finance Act, 1988/Amending Act, 1989	Section of the Wealth- tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
(1)	(2)	(3)	(4)	(5)
1.	127 of the Amending Act, 1987	�	�	Substitution of new authorities in the Wealth-tax Act on the same lines as made by section 2 of the Amending Act, 1987, in the Income-tax Act
2.	(i)128(i), (ii), (iii) and (vii) of the Amending Act, 1987. (ii) 88(e) of the Finance Act, 1988	2	2	Various clauses relating to definition of wealth-tax authorities.
*3.	130 of the Amending Act, 1987	5(1)(xxiva)	80L(1)(va)	Exemption in respect of units of a Mutual fund specified in section 10(23D) of the Income-tax Act.
4.	131 of the Amending Act, 1987	8,9,10 and11(new sections substi- tuted)	116,118,119, 120, 124 [except sub-section (5)] and 127	Designation, control and jurisdiction of wealth-tax authorities.
5.	132 of the Amending Act, 1987	8A, 8AA, 8B, 9A, 10A, 11A, 11AA, 11B, 12 and 13(omitted)	�	Separate sections relating to control, powers and jurisdiction of various wealth-tax authorities are omitted, as these provisions are incorporated in sections 8 to 11 newly substituted, as indicated above.
6.	(i) 149(a) of the Amending Act, 1987	32	�	Amendments to section 32 relating to mode of recovery, pursuant to the change in designation of the wealth-tax authorities.
	(ii) 95(q) of the Amending Act, 1989.
7.	(i)154(1)(b) and(f) and 154(2)(b) of the Amending Act, 1987	37A(1), proviso and 37A(2)	132(1), proviso and 132(1A)	Amendments to section 37A relating to powers of search and seizure pursuant to change in designation of the wealth-tax authorities.
	(ii) 88(g) of the Finance Act, 1988.
8.	(i) 155(a)(ii) of the Amending Act, 1987(ii) 88(h) of the Finance Act, 1988	37B(1)	132A(i)	Amendments to section 37B relating to powers to requisition books of accounts etc., pursuant to change in designation of the wealth-tax authorities
*9.	(i) 158 of the Amending Act, 1987(ii) 88(i) of the Finance Act, 1988	45(j)	10(23D)	Exemption from wealth-tax in respect of net wealth of a Mutual Fund as specified in section 10(23D) of the Income-tax Act.
*10.	159 of the Amending Act, 1987	47 (new section inserted)	298(3) and (4)	Insertion of new section to empower the Central Government to remove any difficulty in giving effect to the provisions of the Wealth-tax Act, as amended by the Amending Act, 1987.

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

Direct Tax Laws (Amendment) Act, 1987-II

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

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

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

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

Direct Tax Laws (Amendment) Act, 1987-II

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

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

Direct Tax Laws (Amendment) Act, 1987-II

Power of the Central Government to remove difficulties

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

Direct Tax Laws (Amendment) Act, 1987-II

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

Direct Tax Laws (Amendment) Act, 1987-II

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

[Section 159 of the Amending Act, 1987]

AMENDMENTS TO THE GIFT-TAX ACT, 1958

Direct Tax Laws (Amendment) Act, 1987-ii

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

Sl. No.	Section of the Amending Act, 1987/Finance Act, 1988/Amending Act, 1989	Section of the Gift-tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
(1)	(2)	(3)	(4)	(5)
1.	161 of the Amending Act, 1987	�	�	Substitution of new authorities in the Gift-tax Act on the same lines as made by section 2 of the Amending Act, 1987 in Income-tax Act.
2.	(i) 162(a) (b), (c) [except in so far as it relates to omission of clause (xvii) of section 2 of the Gift-tax Act relating to definition of the term�partner�] and(g) of the Amending Act, 1987	2	2	Various clauses relating to definition of gift-tax authorities
(ii)	88(j) of the Finance Act, 1988
3.	164 of the Amending Act, 1987	7, 8, 9 and10 (new sections substituted)	116, 118, 119, 120, 124 [ex- cept sub-sec- tion(5)] &127.	Designation, control and jurisdiction of gift-tax authorities
4.	165 of the Amending Act, 1987	7A, 7AA,7B, 8A, 9A, 11,11A, 11AA, 11B & 12(omitted)		Separate sections relating to control, powers and jurisdiction of various gift-tax authorities are omitted as these provisions are incorporated in sections 7 to 10, newly substituted, as indicated above.
5.	(i) 179 (a) of the Amending Act, 1987	�	�	Amendments to section 33 relating to mode of recovery, pursuant to change in designation of gift-tax authorities.
	(ii) 95(s) of the Amen- ding Act, 1989
*6.	185 of the Amending Act, 1987	47(new sec- tion inserted)	298(3) and (4)	Insertion of new section to empower the Central Government to remove any difficulty in giving effect to the provisions of the Gift-tax Act, as amended by the Amending Act.

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

Direct Tax Laws (Amendment) Act, 1987-ii

Power of the Central Government to remove difficulties

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

Direct Tax Laws (Amendment) Act, 1987-ii

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

Direct Tax Laws (Amendment) Act, 1987-ii

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

[Section 185 of the Amending Act, 1987]

AMENDMENTS TO THE COMPANIES (PROFITS) SURTAX ACT, 1964

Direct Tax Laws (Amendment) Act, 1987-ii

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

Sl. No.	Section of the Amending Act	Section of the Companies (Profits) Surtax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
(1)	(2)	(3)	(4)	(5)
1.	187 of the Amending Act, 1987	�	�	Substitution of some new authorities in the Companies (Profits) Surtax Act.
2.	188 of the Amending Act, 1987	3 (new section substituted)	116, 119 and 120	Designation, control and jurisdiction of authorities in the Companies (Profits) Surtax Act.
3.	189(b) of the Amending Act, 1987	18	�	Amendment of section18 relating to the application of the provisions of the Income-tax Act to the proceedings under the Companies (Profits) Sur- tax Act, pursuant to the changes in the provisions of the Income-tax Act relating to designation, control and jurisdiction of authorities.

III

Amendments at a glance*

SECTION/schedule.	Particulars
	Income-tax Act
3/Sch. X	Financial year as uniform previous year for all assessees 2
4(1)	Consequential amendments to section 4 relating to charge of income-tax 3
139, 139A, 140,	Procedure for assessment – Return of income and
140A, 141A &	other related provisions 4.1 – 4.21
142(1)
143	Procedure for assessment : New scheme of assessment 5.1 – 5.18
144, 144A, 144B,	Procedure for assessment : Miscellaneous provisions
145 & 146	6.1 – 6.6
147, 148, 149,	Income escaping assessment 7.1 – 7.14
150, 151, 152
153	Time limit for completion of assessments and re-assessments 8.1 – 8.7
154, 155	Rectification of mistakes and other amendments of orders 9.1 – 9.3
139(8), 140A(3),	Payment of mandatory interest to replace various
215, 216,	interests and penalties 10.1 – 10.4
217, 271(1)(a),
273, 234A, 234B
& 234C
214, 243, 244 &	Payment of interest by the department for delay in
244A	grant of refund due to the assessee 11.1 – 11.9
	Wealth-tax Act
2(q), 3, 14, 15,	Amendment of provisions of the Wealth-tax Act relating
15A, 15B, 15C,	to the valuation date, procedure for assessment, charge of
16, 17, 17A, 17B,	mandatory interest for default in furnishing the return of
34A, 35	wealth, payment of interest by the Government on refund due to the assessee and rectification of mistake to correspond with the provisions of the Income-tax Act 12
	Gift-tax Act
2(xx), 3, 13, 14,	Amendment of provisions of the Gift-tax Act relating
14A, 14B, 15,	to previous year, procedure for assessment, charge of
16, 16A, 16B,	mandatory interest for default in furnishing the
33A, 34	return of gifts, payment of interest by the Government on refund due to the assessee and rectification of mistake to correspond with the provisions of the Income-tax Act and Wealth-tax Act 13

Amendments to the income-tax Act

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Financial year as uniform previous year for all assessees

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

Example 1 :

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

Example 2 :

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

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

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

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

(5) The average rate of tax will be

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

Example 1

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

	Rs.
(1) Total income before deduction for depreciation allowance	6,30,000
(2) Depreciation at the prescribed rates for the period of twelve months	1,20,000
The computation of depreciation allowable, total income and calculation of income-tax for the assessment year 1989-90 will be as under:�
(1) Depreciation allowable :
Enhanced depreciation under rule 5	2,10,000
= Rs. 1,20,000 �21/12	2,10,000
(2) Total income for the assessment year 1989-90 = Rs. 6,30,000�Rs. 2,10,000	4,20,000
(3) Tax payable for the assessment year1989-90:
(i) The proportionate income for 12 months
= Rs. 4,20,000 �12/21	2,40,000
(ii) Tax payable on Rs. 2,40,000	1,04,212
(iii) Average rate of tax
= Rs. 1,04,212/2,40,000	0.4342
(iv) Tax payable on total income for the assessment year 1989-90 = 4,20,000 � 0.4342	1,82,364

Example 2

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

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

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

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

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

(i) Income for the assessment year 1988-89 :�	Rs.
From business (1-7-1986�30-6-1987)	2,40,000
From other sources (1 -4-1987�31-3-1988)	1,20,000
Total income	3,60,000
(ii) Income for the assessment year 1989-90:�
From business (1-7-1987�31-3-1989) (21 months)	4,20,000
*From other sources (1-7-1987�31-3-1989) (21 months)	2,10,000
Total income	6,30,000
* This includes income from other sources for the period 1-7-1987 � 31-3-1988 (9 months) amounting to Rs. 90,000 which has already been taxed in the assessment year 1988-89.
(iii) Computation of tax for the assessment year 1989-90:�	Rs.
(1) Income for 12 months = Rs. 6,30,000 �12/21	3,60,000
(2) Tax on Rs. 3,60,000	1,67,212
(3) Average rate of tax Rs. 1,67,212/ Rs. 3,60,000	= 0.4645
(4) The above average rate of tax will be applied on the total income of the transitional previous year minusincome from other sources for a period of 9 months which has already been taxed in the year 1988-89, i.e.,
Rs. 6,30,000�Rs. 90,000	= Rs. 5,40,000
(5) Tax payable=Rs. 5,40,000 � 0.4645	= Rs. 2,50,830

Example 3

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

For the assessment year 1988-89:�

	Previous year	Income after allowing depreciation claimed u/s 32(1)(ii)
		Rs.
First business	1-7-86�30-6-87	2,00,000
Second business	1-1-87�31-12-87	1,00,000
	Total income	3,00,000
For the assessment year 1989-90:
	Previous year	Income after allowing depreciation claimed u/s 32(1)(ii)
		Rs. Rs.
First business	1-7-87�31-3-89(21 months)	2,35,000 60,000
Second business	1-1-88�31-3-89(15 months)	75,000 36,000

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

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

(1) Income from first business	Rs.
(1-7-87�31-3-89) (21 months)	2,35,000
Less: Enhanced depreciation for 21 months = 60,000 �21/12=	1,05,000
	1,30,000
(2) Income from second business for 1-7-1987 to 31-3-1989 (21 months). For the period 1-1-88�31-3-1989(15 months), as shown	75,000
For the period 1-7-1987�31-12-1987(6 months) being 50% of income of Rs. 1,00,000 for the entire period of 12 months for the assessment year 1988-89	50,000
	1,25,000
Less: Enhanced depreciation for 15 months
=36,000 �15/12	45,000	Rs.
		80,000
(3) Total income for the assessment year 1989-90		2,10,000
(4) Completion of tax of the assessment year 1989-90:�
(i) Income for 12 months=2,10,000 �12/21 =	1,20,000
(ii) Tax on Rs. 1,20,000	41,212
(iii) Average rate of tax=41,212/1,20,000 =	0.3434

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

[Section 5 of the Amending Act, 1987]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Procedure for assessment – Return of income and other related provisions

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

(a) where the assessee is a company	– By 31st December
(b) where the assessee is a person other than a company,�
(i) who is required to get his accounts audited under the Income-tax Act or under any other law, or in the case of a co-operative society:	– By 31st October
(ii) who derives income from business or profession, but does not fall under item (i) above:	– By 31st August
(iii) in any other case	– By 30th June.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

[Section 20 of the Amending Act, 1989]

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Procedure for assessment – New scheme of assessment

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

[Section 48 of the Amending Act, 1987]

[Section 21 of the Amending Act, 1989]

JUDICIAL ANALYSIS

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Procedure for assessment : Miscellaneous provisions

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

[Section 22 of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Income escaping assessment

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

Sl. No	Upto 4 years	Beyond 4 years but	Beyond 7 years but
		upto 7 years	upto 10 years
1	2	3	4
1. Scrutiny cases [i.e., where an assessment order has been passed under section 143(3) or 147]	(i) Assessment can be reopened only by an Assessing Officer of the rank of an Assistant Commissioner or Deputy Commissioner (ii) Assessment can be re-opened whatever be the amount of income which has escaped assessment	(i) Same as (I) in Col. (2) (ii) Assessment can be re-opened only if the income which has escaped assessment is Rs. 50,000 or more for that year (iii) Assessment can be re-opened only with the approval of the Chief Commissioner or Commissioner	(i) Same as (I) Col. (2) (ii) Assessment can be re-opened only if the income which has escaped assessment is Rs. 1 lakh or more for that year (iii Same as (iii) in Col. (3)
2. Non-scrutiny cases [i.e. where no assessment order has been passed under section 143(3) or 147]	(i) Any Assessing Officer can re-open an assessment himself (ii) Assessment can be re-opened whatever be the amount of income which has escaped assessment.	(i) Same as (i) in Col. (2). (ii) Assessment can be re-opened only if the income which has escaped assessment is Rs. 25,000 or more for that year. (iii) Assessment can be re-opened by Assessing Officer below the rank of Deputy Commissioner only with the approval of the Deputy Commissioner.	(i) Same as (i) in Col. (2). (ii) Assessment can be re-opened only if the income which has escaped assessment is Rs. 50,000 or more for that year (iii) Same as (i) in Col. (3).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

JUDICIAL ANALYSIS

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Time limit for completion of assessments and reassessments

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Rectification of mistakes and other amendments of orders

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

Payment of mandatory interest to replace various interests and penalties

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

It has been clarified that,�

the due date for filing of a return of income is the date specified in section 139(1), as applicable in the case of the assessee;
for the purposes of computing interest under this this section, additional income-tax payable under the new section 158B shall not be taken into consideration;
for the purposes of this section an assessment made for the first time under section 147 shall be regarded as a regular assessment.

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

It has been clarified that,�

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

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

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

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

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

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

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

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

(Refer Examples III and IV in para 10.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

(Refer to Examples II to IV in para 10.13)

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

(Refer to Example V in para 10.13)

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

(Refer Example VI in para 10.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

(Refer Example III in para 9.13)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

(i) due date for filing the return for the assessment year 1989-90	31-8-1989
(ii) Date of filing the return	31-12-1989
(iii) Delay in filing the return	4 months
(iv) Advance tax paid	Rs. 2.80,000
*(v) Tax as per returned income	Rs. 3,00,000
(vi) Tax payable under section 140A at the time of filing the return [(v) minus (iv)]	Rs. 20,000
(vii) Interest payable under section 234A at the time of filing the return : (@ 2% per month for 4 months on Rs. 20,000)	Rs. 1,600

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

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

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

(i) Due date for filing the return for the assessment year 1989-90	31-8-1989
(ii) Date of filing there turn	31-12-1989
(iii) Delay in filing the return	4 months
(iv) Advance tax paid	Rs. 2,00,000
(v) Tax as per returned income	Rs. 3,00,000
(vi) 90% of tax as shown in col. (v)	Rs. 2,70,000
(vii) Tax payable under section section 140A at the time of filing the return [col. (v)minus (iv)]	Rs. 1,00,000
(viii) Interest payable under section 234A at the time of filing the return @ 2% per month for 4 months on Rs. 1,00,000)	Rs. 8,000
(ix) Interest under section 234B payable at the time of filing the return (Interest @ 2% per month, for 9 months, i.e., 1-4-1989 to 31-12-1989 on Rs. 1,00,000)	Rs. 18,000
(x) Total amount of interest payable at time of filing the return [col. (viii) + (ix)]	Rs. 26,000

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

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

(i) Due date of filing the return for the assessment year 1989-90	31-8-1989
(ii) Date of filing the return	17-12-1989
(iii) Delay in filing the return	(3 months & 17 days)
(iv) Advance tax paid	Nil
(v) Tax as per returned income	Rs. 3,00,000
(vi) Tax payable under section 140A at the time of filing the return [(v) minus (iv]	Rs. 3,00,000
*(vii) Interest payable under section 234A at the time of filing the return (@ 2% per month for 3 moths and 17 days, i.e., for 4 months) @ 8% on Rs. 3,00,000	Rs. 24,000
(viii) Interest payable under section 234B at the time of filing the return (@ 2% per month for 8 moths and 17 days i.e., for 9 months) @ 18% on Rs. 3,00,000	Rs. 54,000
(ix) Total amount of interest payable at the time of filing the return [cols. (vii) + (viii)]	Rs. 78,000
(x) If regular assessment is completed on 31-12-1990 and tax is determined at Rs. 4,00,000 further interest payable shall be calculated as under :

Interest under section 234A:

@ 2% per month for 3 months and 17 days i.e., for 4 months – @ 8% on Rs. 4,00,000	Rs. 32,000
Less : Interest paid under section 140A at the time of filing the return (col.Vii)	Rs. 24,000	Rs. 8,000
B. Interest under section 234B
(1) @ 2% per month for 8 months and 17 days, i.e., for 9 months @ 18% on Rs. 4,00,000	Rs. 72,000
Less : Interest paid under section 140A at the time of filing the return (col.viii)	Rs. 54,000
	Rs. 18,000
(2) @ 2% per month for 12 months (1-1-1990 to 31-12-1990) on Rs. 1,00,000 (Rs. 4,00,000 – Rs. 3,00,000)	Rs. 24,000	Rs. 42,000
C. Total amount of interest under sections 234A and 234B further payable on regular assessment (A-B)		Rs. 50,000

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

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

(i) Due date of filing the return for the assessment year 1989-90	31-8-1989
(ii) Date of filing the return	31-12-1989
(iii) Delay in filing the return	4 months
(iv) tax deducted at source	Rs. 2,00,000
*(v) Advance tax paid	Rs. 1,60,000
(vi) Tax as per returned income	Rs. 4,00,000
*(vii) 90% of assessed tax % i.e., tax in col. (vi) Less TDS as shown in col. (iv)	Rs. 1,80,000
(viii) Tax payable under section 140A at the time of filing the return [col. (iv)(iv-v)]	Rs. 40,000
(ix) Interest payable under section 234A at the time of filing the return @ 2% per month for 4 months on Rs. 40,000)	Rs. 3,200
(x) Interest payable under section 234B at the time of filing the return (@ 2% per month for 9 moths on Rs. 40,000)	Rs. 7,200
(xi) Total amount of interest payable at the time of filing the return (col. ix-x)	Rs. 10,400
(xii) If regular assessment is completed on 30-6-1990 and tax determined at Rs. 5,00,000 further interest payable shall be calculated as under:

A. Interest under section 234A :	Rs. 11,200
@ 2% p.m. for 4 months on Rs. 1,40,000
Less : Interest paid under section 140A at the time of filing the return [col. (ix)]	Rs. 3,200	Rs. 8,000
B. Interest under section 234B :
(1) @ 2% p.m. for 9 months on Rs. 1,40,000	Rs. 25,200
Less : Interest paid under section 140A at the time of filing the return [col. (ix)]	Rs. 7,200
	Rs. 18,000
(2) @ 2% P.M. for 6 months -1-1990 to 30-6-1990 on Rs. 1,00,000 (Rs. 5,00,000 – Rs. 4,00,000)	Rs. 12,000	Rs. 30,000
C. Total amount of interest further payable on regular assessment		Rs. 38,000

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

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

(i) Tax as per returned income for assessment year 1990-91	Rs. 4,00,000
(ii) Instalments of advance tax payable on :
15-9-1989	Rs. 80,000
15-12-1989	Rs. 1,20,000
Total payment to be made upto 15-12-1989		Rs. 2,00,000
(iii) Instalments of advance tax paid on:
15-9-1989	Rs. 50,000
15-12-1989	Rs. 50,000
Total payment actually made upto 15-12-1989		Rs. 1,00,000
(iv) Shortfall upto 15-9-1989	Rs. 30,000
(v) Shortfall upto 15-12-1989	Rs. 1,00,000

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

(i) Interest of Rs. 30,000 @ 1�% per month for 3 months	Rs. 1,350
(ii) Interest on Rs. 1,00,000 @1�% per cent per month for 3 months	Rs. 4,500
(iii) Total interest payable under section 234C	Rs. 5,850

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

(i) Tax as per returned income for assessment year 1990-91	Rs. 2,00,000
*(ii) Tax on capital gains arising on 30-10-1989 included in col. (i)	Rs. 50,000
(iii) Instalments of advance tax payable :
on 15th September, 1989	Rs. 30,000
on 15th December, 1989	Rs. 95,000
Total payments to be made upto 15-12-1989		Rs. 1,25,000
(iv) Advance tax paid on 15-9-1989	Rs. 20,000
15-12-1989	Rs. 50,000
Total payment actually made upto 15-12-1989		Rs. 70,000
(v) Shortfall upto 15-9-1989	Rs. 10,000
(vi) Shortfall upto 15-12-1989	Rs. 55,000
(vii) Insterest under section 234C will be calculated as under :
(i) Interest on Rs. 10,000 @ 1�% per month for 3 months	Rs. 450
(ii) Interest on Rs. 55,000 @ 1�% per month for 3 months	Rs. 2,475
(iii) Total interest payable under section 234C		Rs. 2,925

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

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

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

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

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

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

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

(i) Tax paid by way of advance tax /TDS before 31-3-1989	Rs. 3,00,000
(ii) Tax due as per return of income for the asessment year 1989-90 filed on 31-8-1989, the due date Rs. 2,40,000
(iii) Refund due to the assessee	Rs. 60,000
(iv) Date of actual refund granted under section 143(1)	10-10-1989
*(v) Interest payable by the Department @ 1.5% per month for 6 months and 10 days (1-4-1989 to 10-10-1989), i.e., for 7 months – @ 10.5% on Rs. 60,000	Rs. 6,300

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

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

(i) Tax paid by way of advance tax/TDS before 31-3-1989	Rs. 3,00,000
(ii) Tax due as per return of income for assessment year 1989-90	Rs. 2,00,000
(iii) Due date for filing the return of income	31-8-1989
(iv) Date of filing the return	31-2-1989
(v) Delay in filing the return	4 months
(vi) Refund due to the assessee	Rs. 1,00,000
(vii) Date of actual refund granted under section 143(1)	31-1-1990
*(VIII) Interest payable by the Department @ 1.5% per month for six months (i.e., 10 months comprised in the period 1-4-1989 – 31-1-1990 minus 4 months of delay in filing the return) i.e., @ 9% on Rs. 1,00,000	Rs. 9,000

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

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

(i) Tax due as per return of income for the assessment year 1989-90 filed on 31-10-1989, the due date	Rs. 3,00,000
*(ii) The tax of Rs. 3,00,000 due as per return has been paid by the assessee as follows:-
By way of advance tax by 31-3-1989	Rs. 2,80,000
Under section 140A on 31-10-1989	Rs. 20,000	Rs. 3,00,000
(iii) Tax determined on completion of regular assessment under section 143(3) on 31-3-1990		Rs. 4,00,000
(iv) Date of payment of further demand of Rs. 1,00,000 [col. (iii) minus (ii)]	1-5-1990
(v) Tax determined as a result to appeallate order under section 250 on 30-9-1990	Rs. 3,20,000
(vi) Refund due as a result of appeal	Rs. 80,000
(vii) Date of grant of actual reund	31-10-1990
(viii) Interest payable by the Department @ 1.5% per month for 6 months (1-5-1990-31-10-1990), i.e., @ Rs. 9% on 80,000	Rs. 7,200

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

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

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

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

[Section 41 of the Amending Act, 1989]

AMENDMENTS TO THE WEALTH-TAX ACT

Direct Tax Laws (Amendment) Act, 1987-III

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

TABLE

Sl. No	Section of the ameding act, 1987/amending act, 1989	Section of the wealth-tax act that has been amended	Corresponding section of the income-tax act	Subject-matter of the amendment in brief
1	2	3	4	5
1.	128(vi) of the Amending Act, 1987	2(q)	–	Amendment of definition of valuation date in the Wealth tax Act, consequent upon the substitution of new section 3 in the income-tax act relating to definition of �Previous year�.
2.	129 of the Amending Act, 1987	3	4	Amendments to section 3 relating to charge of Wealth-tax consequent upon the charge of additional wealth-tax.
*3.	133 of the Amending Act, 1987	14	139 (1),(2)and(10)	Amendments to section 14 relating to furnishing of the return of wealth.
4	134 of the Amending Act, 1987	15 (new sections substituted)	139(4) &(5)	Substitution of new section 15 relating to filing of a revised or a belated return of wealth.
5	135 of the Amending Act, 1987	15a	140	Amendments to section 15A relating to persons competent to sign the return of wealth.
6	136 of the Amending Act, 1987	15B (new section substituted)	140a	Substitution of new section 15B relating to payment of self-assessment tax at the time of filing of the return of wealth.
7	137 of the Amending Act, 1987	15C (omitted)	141	Omission of section 15C relating to provisional assessment for wealth-tax, consequent upon the new procedure of assessment.
8.	(i) 138 of the Amending Act, 1987 (ii) 64 of the Amending Act, 1987	16 (new section substituted)	142, 143 and 144	Substitution of new section 16 relating to procedure for assessment and its further amendments to stream-line the procedure including the provision for charge of additional wealth-tax, where the returned wealth is increased under the provisions of section 16(1).
9.	(i) 139 of the Amending Act, 1987 (ii) 66 of the Amending Act, 1987	17	147 to 151	Amendments to section 17 relating to assessment or reassessment of wealth- escaping assessment.
*10.	140 of the Amending Act, 1987	17A	153	Amendments to section 17A relating to time limit for completion of assessment and reassessment.
11.	(i) 141 of the Amending Act, 1987 (ii) 67 of the Amending Act, 1987	17B (new section inserted)	234a	Insertion of new section 17B to provide for charge of mandatory interest for default in furnishing return of wealth.
12.	(i) 150 of the Amending Act, 1987 (ii) 73 of the Amending Act, 1987	34A(4A) & (4B) (new sub-sections inserted)	243, 244 and 244A	Insertion of new sub-section in 34A to restrict the old provisions regarding payment of interest on refunds contained in sub-sections (3), (3A) and (4) to assessment year 1988-89 and earlier assessment years and to provide for new mode of payment of interest on refunds effective from the assessment year 1989-90.
13.	151 of the Amending Act, 1987	35	154	Amendments to section 35 relating to rectification of mistake apparent from record.

*The provisions in respect of items at Sl. Nos. 3 and 10, which have been star marked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-III

12.2 Amendments relating to furnishing of the return of wealth (section 14) – The Amending Act, 1987 has made the following amendments in the provisions of section 14 of the Wealth-tax Act relating to the furnishing of the return of wealth:

(i) A new sub-section (1) has been substituted, which contains provisions for filing the return of wealth by the due date on the same lines as the provisions for filing the return of income which are contained in section 139(1) of the Income-tax Act. It is provided that the due date for furnishing the return of wealth by an assessee will be the same as the due date for furnishing the return of income in his case.

(ii) Sub-section (2), which provided for the issue of a notice calling for return of wealth, has been omitted on the same lines as the omission of sub-section (2) of section 139 of the Income-tax Act.

(iii) In place of sub-section (2) so omitted, a new sub-section (2) has been substituted to introduce in the Wealth-tax Act, for the first time, the provisions regarding a return showing net wealth below the taxable limit. These provisions correspond to the provisions of sub-section (10) of section 139 of the Income-tax Act. It has been provided that a return of net wealth, which shows the net wealth below the maximum amount which is not chargeable to tax shall be deemed never to have been filed. It is, however, provided that this will not apply to a return furnished in response to a notice under section 17 calling for a return of wealth.

(iv) Sub-section (3) which empowered the Wealth-tax Officer to extend the date for furnishing the return of wealth has been omitted to bring the provisions in line with those of the amended section 139 of the Income-tax Act.

Direct Tax Laws (Amendment) Act, 1987-III

12.3 Amendments made by the Finance Act, 1989 in section 17A relating to time limit for completion of assessment and reassessment – Section 28 of the Finance Act, 1989 has further amended sub-section (1) of section 17A by substituting the proviso, which provided transitory provisions for completion of assessment under section 16 for the assessment years 1985-86 and 1986-87, by a new proviso which now provides transitory provisions for completion of such assessments for the assessment year 1988-89 and earlier assessment years.

Amendments to the Gift-tax Act

Direct Tax Laws (Amendment) Act, 1987-III

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

TABLE

Sl. No.	Section of the Amending Act, 1987/Amending Act, 1989	Section of the Gift-tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
1	2	3	4	5
1.	162(f) of the Amending Act, 1987	2(xx)	3	Amendment of the definition of �previous year� in the gift-tax act, consequent to the substitution of new section 3 in the income-tax act relating to definition of �previous year� in that act.
2.	163 of the Amending Act, 1987	3	4	Amendments to section 3 relating to charge of gift-tax, consequent upon the levy of additional gift-tax.
*3.	166 of the Amending Act, 1987	13	139(1),(2) and (10)	Amendments to section 13 relating to furnishing of the return of gifts.
4.	167 of the Amending Act, 1987	14 (new section substituted)	139(4) and (5)	Substitution of new section 14 relating to filing of a revised or a belated return of gifts.
5.	168 of the Amending Act, 1987	14a	140	Amendments to section 14A relating to persons competent to sign the return of gifts.
*6.	169 of the Amending Act, 1987	14b (new section inserted)	140a	Insertion of a new section 14B relating to payment of self-assessment tax at the time of filing of the return of gifts.
7.	(i) 170 of the Amending Act, 1987 (ii) 83 of the Amending Act, 1989	15 (new section (substituted)	142, 143 and 144	Substitution of new section 15 relating to procedure of assessment and its further amendments to streamline the procedure, including the provision for charging additional gift-tax where the taxable gifts declared in the return are increased under the provision of section 15(1).
8.	(i) 171 of the Amending Act, 1987 (ii) 84 of the Amending Act, 1989	16	147 to 151	Amendments to section 16 relating to assessment or reassessment of gifts escaping assessment.
*9.	172 of the Amending Act, 1987	16A	153	Amendments to section 16A relating to time limit for completion of assessment and reassessment.
10.	(i) 173 of the Amending Act, 1987 (ii) 85 of the Amending Act, 1989	16B (new section inserted)	234A	Insertion of new section 16B to provide for charging of mandatory interest for default in furnishing return of gifts
11.	(i) 180 of the Amending Act, 1987 (ii) 90 of the Amending Act, 1989	33A(4A) & (4B) (New sub-sections inserted)	243, 244 and 244A	Insertion of new sub-sections in section 33A to restrict the old provisions regarding payment of interest on refunds contained in sub-sections (3), (3A) and (4) to assessment year 1988-89 and earlier assessment years, and to provide for new mode of payment of interest on refunds effective from the assessment year 1989-90.
12.	181 of the Amending Act, 1987	34	154	Amendments to section 34 relating to rectification of mistake apparent from record.

*The provisions in respect of items at Sl. Nos. 3, 6 and 9, which are starmarked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-III

13.2 Amendments relating to furnishing of the return of gifts (section 13) – The Amending Act, 1987 has made amendments to the provisions of section 13 of the Gift tax Act relating to the furnishing of the return of gifts, which are on the same lines as the amendments made to the corresponding section 14 of the Wealth-tax Act (as explained in para 12.2 ante). The only difference is that the due date for furnishing the return of gifts in all cases is 30th June of the relevant assessment year, inserted of staggered due dates for filing the returns of income or the returns of wealth.

Direct Tax Laws (Amendment) Act, 1987-III

13.3 Insertion of new section 14B relating to payment of self-assessment tax at the time of furnishing the return of gifts- Earlier, there were no provisions in the Gift-tax Act, corresponding to the provisions of section 140A of the Income-tax Act and section 15B of the Wealth-tax Act, for payment of self-assessment tax at the time of furnishing the return of gifts. The Amending Act, 1987 has inserted a new section 14B in the Gift-tax Act containing such provisions. The provisions of the said new section 14B are on the same lines as the amended provisions of section 140A of the Income-tax Act or the amended provisions of section 15B of the Wealth-tax Act. The provisions of section 140A and the amendments made thereto have been explained in para 3.15 ante.

Direct Tax Laws (Amendment) Act, 1987-III

13.4 Amendments made by the Finance Act, 1989 in section 16A relating to time limit for completion of assessment and reassessment – Section 31 of the Finance Act, 1989 has made the following further amendments to sub-section (1) of section 16A to bring its provisions at par with the provisions of the corresponding section 17A of the Wealth-tax Act:

(i) The time limit for completion of an assessment under section 15, which was one year, as per the new sub-section (1) inserted by the Amending Act, 1987, has been increased to two years from the end of the relevant assessment year.

(ii) A new proviso has been substituted for the old proviso to provide transitory provisions for completion of assessments under section 15 for the assessment year 1988-89 and earlier assessment years.

Amendments to the Gift-tax Act

Direct Tax Laws (Amendment) Act, 1987-III

TABLE

Sl. No.	Section of the Amending Act, 1987/Amending Act, 1989	Section of the Gift-tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
1	2	3	4	5
1.	162(f) of the Amending Act, 1987	2(xx)	3	Amendment of the definition of �previous year� in the gift-tax act, consequent to the substitution of new section 3 in the income-tax act relating to definition of �previous year� in that act.
2.	163 of the Amending Act, 1987	3	4	Amendments to section 3 relating to charge of gift-tax, consequent upon the levy of additional gift-tax.
*3.	166 of the Amending Act, 1987	13	139(1),(2) and (10)	Amendments to section 13 relating to furnishing of the return of gifts.
4.	167 of the Amending Act, 1987	14 (new section substituted)	139(4) and (5)	Substitution of new section 14 relating to filing of a revised or a belated return of gifts.
5.	168 of the Amending Act, 1987	14a	140	Amendments to section 14A relating to persons competent to sign the return of gifts.
*6.	169 of the Amending Act, 1987	14b (new section inserted)	140a	Insertion of a new section 14B relating to payment of self-assessment tax at the time of filing of the return of gifts.
7.	(i) 170 of the Amending Act, 1987 (ii) 83 of the Amending Act, 1989	15 (new section (substituted)	142, 143 and 144	Substitution of new section 15 relating to procedure of assessment and its further amendments to streamline the procedure, including the provision for charging additional gift-tax where the taxable gifts declared in the return are increased under the provision of section 15(1).
8.	(i) 171 of the Amending Act, 1987 (ii) 84 of the Amending Act, 1989	16	147 to 151	Amendments to section 16 relating to assessment or reassessment of gifts escaping assessment.
*9.	172 of the Amending Act, 1987	16A	153	Amendments to section 16A relating to time limit for completion of assessment and reassessment.
10.	(i) 173 of the Amending Act, 1987 (ii) 85 of the Amending Act, 1989	16B (new section inserted)	234A	Insertion of new section 16B to provide for charging of mandatory interest for default in furnishing return of gifts
11.	(i) 180 of the Amending Act, 1987 (ii) 90 of the Amending Act, 1989	33A(4A) & (4B) (New sub-sections inserted)	243, 244 and 244A	Insertion of new sub-sections in section 33A to restrict the old provisions regarding payment of interest on refunds contained in sub-sections (3), (3A) and (4) to assessment year 1988-89 and earlier assessment years, and to provide for new mode of payment of interest on refunds effective from the assessment year 1989-90.
12.	181 of the Amending Act, 1987	34	154	Amendments to section 34 relating to rectification of mistake apparent from record.

*The provisions in respect of items at Sl. Nos. 3, 6 and 9, which are starmarked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-III

IV

Amendments at a glance

Section/Schedule	Particulars
	Income-tax Act
10(2A)	Exemption of share of a partner in the income of a firm [(insertion of new clause (2A)] 3.2
10(4)/(4A)	Merger of clauses (4) and (4A) and also rationalisation of the provisions of these clauses 3.3-3.5
10(5)	Amendment of provisions relating to exemption of travel concession and assistance received from employers 3.6-3.8
10(10)	Amendment of provisions relating to exemption of gratuities received by employees on retirement, termination of service, death, etc. 3.9-3.14
10(10A)	Amendment of provisions relating to exemptions of amount received by an employee by way of commutation of pension 3.15
10(10AA)	Amendment of provisions relating to exemption of the amount received by an employee as cash equivalent of leave salary to his credit on his retirement 3.16-3.20
10(10B)	Amendment of provisions relating to exemption of compensation received by a workman under the �Industrial Disputes Act, 1947�, etc. 3.21, 3.22
10(14), 2(24) (iiia)	Amendment of the provisions relating to exemption of allowances, etc., granted to the employees and definition of �income� 3.23-3.28
10(15)	Amendment of provisions relating to exemption of interest, etc., on Government securities, bonds, annuity certificates, savings certificates and deposits 3.29, 3.30
10(17A)/(17B)	Merger of clauses (17A), (17B) and (18) into a single new
& 18	clause (17A) and also simplification and rationalisation of the provisions of these clauses 3.31, 3.32
10(21), 10(23) &	Omissions of clauses (21) and (23) and sub-clauses (iv)
10(23C)(iv)/(v)	& (v) of clause (23C) by the Amending Act, 1987 and their restoration, with adequate safeguards against misuse, by Amending Act, 1989 3.33, 3.34
10(21)	Provisions of the new clause 21 relating to exemption of income of a scientific research association 3.35
10(23)	Provisions of the clause (23) relating to exemption of income of a sports association or institution 3.36
10(23C)(iv)/(v)	Provisions of the new sub-clauses (iv) and (v) of clause (23C) relating to exemption of income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution 3.37-3.42
2(24) (iia), 11,	Omission of sections, 11, 12, 12A and 13 by the Amendment
12, 12A & 13	Act, 1987 and their restoration by the Amending Act, 1989 4.1
11(1) and	Amendment to sub-section (1) of the section 11 by the
2(24) (iva)	Amending Act, 1989 to exclude corpus donations from the total income of the trust or institution and amendment of definition of �income� contained in section 2(24) by the Amending Act, 1987 4.2-4.6
11(5)	Amendments to sub-section (5) of section 11 by the Amending Act, 1989 to expand the scope of specified assets for purposes of investment of accumulated income of trusts, etc. 4.7, 4.8
35, 35B, 35C,	Omission of sections 35, 35B, 35C, 35CC, 35CCA and 35CCB
35CC, 35CCA	by the Amending Act, 1987 5.1
& 35CCB
35, 35CCA,	Restoration of sections 35, 35CCA and 35CCB by the
35CCB	Amending Act, 1989 5.2
35(1)	Amendments to section 35(1) by the Amending Act, 1989 to provide safeguards against the misuse of the provisions of the section 5.3-5.5
28 Expln. 1, 39	Omission of provisions relating to Managing Agency Commission (Explanation 1 to section 28 and section 39) 6.2
36(1)(ii) & 43B	Amendments to section 36(1)(ii) and 43B to rationalise provisions regarding allowability of bonus and commission payments 6.3-6.5
36(1)(vii)/(2)	Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts 6.6, 6.7
36(1)(viia)	Amendments to section 36(1)(viia) to include definition of �scheduled bank� therein 6.8
39, 40 (b)/(ba)	Amendments to section 40 relating to certain amounts not
40(c)	deductible in computing the income under the head �profits and gains of business or profession�6.9
40A(3)	Amendment to section 40A(3) relating to mode of payment for expenses 6.10
40A(5)/(6)	Omission of sub-sections (5) and (6) of section 40A 6.11, 6.12
64(1)	Certain amendments to section 64(1) by the Amending Act, 1987, which have been withdrawn by the Amending Act, 1989 7.1, 7.2
64(1)	Other amendments to section 64(1) by the Amending Act, 1987, which have not been withdrawn by the Amending Act, 1989 7.3, 7.4
80A(3)	Amendments to section 80A, containing general principles regarding deductions allowable under Chapter VIA, by the Amending Act, 1987 and their reversal by the Amending Act, 1989 8.2, 8.3
2(22A), 80B	Omission of certain �definitions� from Chapter VIA 8.4
80E, 80QQ	Omission of sections 80E and 80QQ 8.5
80F	Insertion of new section 80F by the Amending Act, 1987 and its omission by the Amending Act, 1989 8.6
80G	Amendment to section 80G by the Amending Act, 1987 and reversal of most of the amendments by the Amending Act, 1989 8.7, 8.8
80GGA	Omission of section 80GGA by the Amending Act, 1987 and its restoration by the Amending Act, 1989 8.10, 8.11
131	Amendments of the provisions conferring powers of a civil court in certain matters on the income-tax authorities (section 131) 9.1, 9.3
132	Amendments of the provisions relating to search and seizure 9.4-9.8
132A	Consequential amendments to section 132A relating to powers to requisition books of account, etc. 9.9
133	Amendments of the provisions relating to powers of income-tax authorities to call for information 9.10, 9.11
133A	Amendment of the provisions relating to power of survey 9.12
138	Amendments of the provisions relating to disclosure of information respecting assessees 9.13, 9.14
2(29C), 164	Amendments to section 164 by the Amending Act, 1987 and reversal of the amendments by the Amending Act, 1989 10.1, 10.3
164A	Amendment of section 164A dealing with charge of tax in the case of oral trust 10.4
167B	Insertion of section 167B to tax certain association of persons and body of individuals at the maximum marginal rate 11.1
167B	Insertion of a new section 167B by the Amending Act, 1989 11.2, 11.3
	Amendments in the provisions of other sections connected with the taxation of association of persons, body of individuals and their members 11.4
40(ba)	Provisions of new clause (ba) of section 40 11.5
67A	Provisions of new section 67A 11.6
86(v)	Old and the new provisions of clause (v) of section 86 11.7, 11.8
	Change of sub-heading �DD – Association of persons – Special cases� of Chapter XV 11.9
	Streamlining the procedure for recovery to make it more effective 12.1
2(43B)	Omission of the definition of �Tax Recovery Commissioner� 12.2
2(44)	Amendment of the definition of TRO 12.3, 12.5
220	Amendments of the provisions relating to time for payment of tax demand and charge of interest for delayed payments 12.6, 12.7
222	Amendments of the provisions regarding issue of recovery certificates to the TRO 12.8
223, 224 & 225	Substitution of the old sections 223, 224 and 225 by the new sections 223, 224 and 225 12.9, 12.11
226	Amendments of the provisions relating to other modes of recovery 12.12
228	Omission of section 228 relating to recovery of Indian tax in Pakistan and Pakistan tax in India 12.13
228A	Consequential amendments in section 228A relating to recovery of tax in pursuance of agreements with foreign countries 12.14
222 to 226,	Amendments to sections 222 to 226, 228 and 228A by the
228 & 228A	Amending Act, 1989 12.15
230	Amendments of the provisions relating to the issue of tax clearance certificate to persons leaving India 12.16, 12.17
230A	Amendments of the provisions relating to restrictions on transfer of immovable property in certain cases 12.18
231	Omission of section 231 relating to the time limit for commencing recovery proceedings 12.19
IInd Sch.	Amendments of the provisions of the Second Schedule relating to procedure for recovery of tax by the TRO 12.20, 12.21
	Amendments to the Second Schedule by the Amending Act, 1989 12.22
IIIrd Sch.	Amendments to the Third Schedule by the Amending Act, 1987 and the Amending Act, 1989 12.23-12.25
240	Amendments of the provisions relating to refund on appeal or any other proceeding under the Act (Section 240) 13.1-13.3
246	Substitution of a new section 246 by the Amending Act, 1987 and further amendments therein by the Amending Act, 1989 14.1-14.4
Chapter XX	Amendment of the sub-heading �A� of Chapter XX relating to appeals and revisions 14.5
246A	Insertion of new-section 246A by the Amending Act, 1987, and its omission by the Amending Act, 1989 14.6, 14.7
269SS	Amendments of the provisions which require the taking or accepting of a loan or deposit by an account-payee cheque or account-payee bank draft 15.1, 15.2
269T	Amendments of the provisions which require the repayment of certain deposits by an account-payee cheque or account- payee bank draft 15.3-15.5
270, 272, 272A	Omission of sections 270, 272 and 272B consequent
& 272B	upon the incorporation of the provisions thereof in a new section 272A 16.2
271	Amendments to section 271 by the amending Act, 1987 and the Amending Act, 1989 16.3
271A	Amendments to section 271A relating to penalty for failure to keep, maintain or retain books of account, documents, etc. 16.4
271C	Insertion of a new section 271C to provide for levy of penalty for failure to deduct tax at source 16.5
271D, 271E	Insertion of new sections 271D and 271E to provide for levy of penalties for failure to comply with the provisions of sections 269SS and 269T 16.6
272A	Substitution of a new section 272A to provide for levy of penalties for miscellaneous defaults 16.7-16.11
273	Amendments to section 273 to bar its applicability after the assessment year 1988-89 16.12
273A	Amendments to section 273A by the Amending Act, 1987 and the Amending Act, 1989 16.13, 16.14
273B	Amendments to section 273B by the Amending Act, 1987 and the Amending Act, 1989 16.15
274	Amendments to the provisions of section 274 relating to procedure for levy of penalties 16.16, 16.17
275	Amendments to section 275 by the Amending Act, 1987 and the Amending Act, 1989 16.18, 16.20
276	Insertion of new section 276 to provide punishment for certain fraudulent actions to thwart tax recovery 17.1
276B	Substitution of a new section for section 276B to exclude failure to deduct tax at source from prosecution provisions and to provide prosecution only for failure to pay tax deducted at source to the government 17.2-17.4
276DD & 276E	Omission of sections 276DD and 276E 17.5
278AA	Consequential amendments 17.6
293B	Insertion of a new section 293B to empower the Central Government or Board to condone delays in obtaining approval 18.1, 18.2
10(15)(iiia), 10A,	Consequential amendments 19.1-19.3
29, 40A(2)(a), 41,
44, 80, 80HHA,
132B(1)(iii),
133A(6),
139(8)(b),
144A, 174(4) &(6),
176(5) &(7), 199,
219, 234, 276CC,
288(4)(b) & First
Sch., rule 5(a)
	Wealth-tax Act
2(h), 2(lc), 18,	Amendments to provisions of Wealth-tax Act to bring
18A, 21AA,	its provisions in line with corresponding provisions of
23, 31, 32,	Income-tax Act 20
34A, 35K, 37,
37A, 37B,
37C, 38
18, 18A	Amendments to sections 18 and 18A relating to penalties under the Wealth-tax Act, by the Amending Act, 1987 and the Amending Act, 1989 21
37	Amendments to section 37, relating to power to take evidence on oath, etc., by the Amending Act, 1987 and by the Finance Act, 1988 22
37A	Amendments to section 37A, relating to power of search and seizure by the Amending Act, 1987 and by the Finance Act, 1988 23
	Gift-tax Act
2(xviii), 2(viii),	Amendments to the provisions of the Gift-tax Act in
2(xi), 17, 17A,	order to bring these provisions in line with the
22, 32, 33,	corresponding provisions of the Income-tax Act and
33A, 36, 37	the Wealth-tax Act 24
& 45
17, 17A	Amendments to sections 17 and 17A, relating to penalties under the Gift-tax Act, by the Amending Act, 1987 and the Amending Act, 1989 25
36	Amendments to section 36, relating to power to take evidence on oath, etc., by the Amending Act, 1987 and by the Finance Act, 1988 26
45	Amendments to section 45, relating to the non-application of the provisions of the Gift-tax Act in certain cases, by the Amending Act, 1987 and by the Amending Act, 1989 27.1-27.4

Amendments to the Income-tax Act

DIRECT TAX LAWS (AMENDMENT) ACT, 1987 -IV

Incomes which do not form part of total income (section 10)

3.1 Section 10 of the Income-tax Act deals with incomes which do not form part of total income, i.e.,incomes which are totally exempt from income-tax. This section contains a large number of clauses, which provide various types of exemptions to achieve different social and economic objectives. The Amending Act, 1987 has amended, omitted or newly inserted a number of clauses of this section. The Amending Act, 1989 has made further changes in some of the amendments made by the Amending Act, 1987. These are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Exemption of share of a partner in the income of a firm [insertion of new clause (2A)]

3.2 This was withdrawn by the Amending Act, 1989 [refer item 2 of the Table given in para 2.3 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Merger of clauses (4) and (4A) and also rationalisation of the provisions of these clauses

3.3 Under the old provisions of clause (4), the following income was exempt in the case of a non-resident (whether an individual or a company or a firm, etc.) :�

(i) any income from interest on such securities as the Central Government might, by notification in the Official Gazette, specify in this behalf, and

(ii) any income from interest on or from premium on redemption of certain types of bonds, which were specified in the clause.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.4 Under the old provisions of clause (4A), exemption from tax was provided to a person resident outside India in respect of his income from interest on money standing to his credit in a Non-Resident (External Account) in any bank in India in accordance with the Foreign Exchange Regulation Act, 1973 and any rules made thereunder. An Explanation to this clause clarified that �person resident outside India� shall have the same meaning as in clause (q) of section 2 of the Foreign Exchange Regulation Act, 1973. From the definition given in section 2(q) of FERA, 1973, it follows that the provisions of this clause applied only to indivi-duals residing outside India and not to any other entity like a company, firm, etc.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.5 Since both the said clauses (4) and (4A) serve the same purpose of encouraging investments in India by non-residents by exempting income earned by them from certain securities, bonds or bank accounts, the Amending Act, 1987 has merged these two clauses into a single clause (4) with two sub-clauses (i) and (ii) providing for the same exemptions in a rationalised manner. The changes made are indicated below:

(i) Sub-clause (i) of the new clause (4), which corresponds to the old clause (4), provides that bonds, income from which by way of interest or premium on redemption is intended to be exempt, will also be notified in the Official Gazette in the same manner as securities. Consequently, the specific mention of the type of bonds, which occurred in the old clause (4), does not find place in sub-clause (i) of the new clause (4).

(ii) Sub-clause (ii) of new clause (4), which corresponds to the old clause (4A), incorporates the provisions of the Explanation to the old clause (4A) in the main provision itself. It also clearly mentions that its provisions are applicable to an individual, who is a �person resident outside India�, as defined in section 2(q) of FERA, 1973.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of travel concession and assistance received from employers [clause (5)]

3.6 Under the old provisions of clause (5), the value of any travel concession or assistance received by an employee, who was citizen of India, from his employer was exempt if it was in connection with his proceeding on leave with his family to any place in India, or if it was in connection with their proceeding to any place in India after retirement from service or after termination of service of the employee. The clause consisted of two sub-clauses as follows:

(i) Sub-clause (i) applied to the assessment year 1970-71 and earlier assessment years.

(ii) Sub-clause (ii) applied to the assessment year 1971-72 and subsequent assessment years.

The exemption was subject to the safeguards provided in the proviso to sub-clause (ii) of the said clause (5). It was also subject to the conditions prescribed in rule 2B of the Income-tax Rules, 1962.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.7 The Amending Act, 1987 has substituted a new clause (5) in the section with a view to rationalise its provisions and also to make it more broad-based. The salient features of the new clause are :

(i) The exemption is now available to all the employees, irrespective of the fact whether they are citizens of India or not.

(ii) The obsolete portion of the old clause, which related to the assessment year 1970-71 and earlier assessment years, has been omitted.

(iii) The exemption under the clause shall now be available only if the amount of travel concession or assistance has been actually incurred by the concerned employee for the purposes of the travel.

(iv) It has been specifically mentioned in the clause itself that the conditions to be prescribed for availing of the exemption may include conditions as to the number of journeys and the amount which shall be exempt per head.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.8 It may be mentioned that Income-tax (First Amendment) Rules, 1989, issued under Notification No. S.O. 239(E), dated 29-3-1989 has substituted a new rule 2B in the Income-tax Rules, 1962, which prescribes conditions that are in conformity with the provisions of the new clause (5) of section 10 of the Income-tax Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of gratuities received by employees on retirement, termination of service, death, etc. [clause (10)]

3.9 Clause (10) which exempts from tax the gratuity received by an employee or his legal heirs on his retirement, termination of employment, death, etc., covers three classes of employees as follows:�

(i) Sub-clause (i) deals with employees of Central Government, State Governments and local authorities, who receive death-cum-retirement gratuity.

(ii) Sub-clause (ii) deals with employees who receive gratuity under the Payment of Gratuity Act, 1972.

(iii) Sub-clause (iii) deals with employees of private employers, i.e., those employees who are not covered under sub-clauses (i) and (ii) above.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.10 Under the old provisions of sub-clause (iii) of clause (10), any gratuity received by an employee of a private employer on his retirement or on termination of his employment or on his becoming incapacitated before retirement or any gratuity received by his legal heirs on his death was exempt from tax to the extent it did not exceed one-half month�s salary for each year of completed service, calculated on the basis of the average salary for the three years immediately preceding the year in which the gratuity was paid. The gratuity was further subject to the maximum limit of Rs. 36,000 or 20 months� salary so calculated, whichever was less.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.11 With a view to rationalise the provisions of the said sub-clause (iii), the Amending Act, 1987 has made the following amendments therein:�

(i) Calculation of the amount of gratuity to be exempted is now to be made on the basis of the average salary for 10 months immediately preceding the month of retirement, etc., instead of the average of three years, as was the case under the old provisions.

(ii) The maximum limits of exemption, namely, Rs. 36,000 or 20 months� salary are not specified in the sub-clause. Instead, it is now provided that the limit may be specified by the Central Government by way of notification in the Official Gazette, having regard to the limit applicable to the Central Government employees. As a result of this amendment, it would not be necessary to make frequent changes in the Income-tax Act every time the monetary limit is to be changed as and when the maximum amount of allowable gratuity is changed in the case of Central Government employees.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.12 There were four provisos in the old clause (10), which provided as under:�

(i) The first proviso stipulated that where gratuities were received from two or more employers in the same year, the maximum amount of gratuity to be exempt would be Rs. 36,000.

(ii) The second proviso stipulated that where gratuity or gratuities were received in any earlier year or years also, the limit of Rs. 36,000 would be reduced by the amount of gratuity or gratuities which had been exempted in the earlier year or years.

(iii) The third proviso empowered the Central Government to further raise the monetary ceiling of Rs. 36,000 by notification in the Official Gazette, keeping in view the maximum amount of gratuity which may be exempt in the case of Government servants.

(iv) The fourth proviso stipulated that where the retirement, incapacitation, termination of employment or death of the employee had taken place before 31-1-1982, the maximum amount of gratuity to be exempted would be Rs. 30,000.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.13 In view of the fact that the monetary limit of Rs. 36,000, which was earlier mentioned in sub-clause (iii) has been omitted therefrom and is now to be specified by the Central Government in the Notification to be issued in the Official Gazette from time to time, the Amending Act, 1987 has made consequential amendments in the first and the second provisos. The Amending Act, 1987 has further omitted the third and fourth provisos, as these provisions are no longer necessary.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.14 The Amending Act, 1987 has also amended the Explanation to clause (10) which defines the term �salary� for the purposes of the clause, to provide that the definition will also be valid for the purposes of clause (10AA).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of amount received by an employee by way of commutation of pension [clause (10A)]

3.15 Commutation of pension received from private employers is exempt to the extent mentioned in sub-clause (ii) of clause (10A). A proviso to the clause provided that the limits of payment mentioned in sub-clause (ii) shall not apply in respect of any such payment made before 19-8-1965. The Amending Act, 1987 has omitted this proviso, as its provisions had become redundant.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of the amount received by an employee as cash equivalent of leave salary to his credit on his retirement [clause (10AA)]

3.16 Clause (10AA), which exempts from tax the cash equivalent of leave salary in respect of earned leave to the credit of an employee, received by him at the time of retirement covers two classes of employees as follows:

(i) Sub-clause (i) deals with employees of Central Government or a State Government.

(ii) Sub-clause (ii) deals with employees other than employees of the Central Government or a State Government.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.17 Under the old provisions of sub-clause (ii) of the said clause (10AA), any payment received by an employee, other than an employee of the Central Government or a State Government, as cash equivalent of leave salary in respect of the period of earned leave to his credit at the time of his retirement was exempt from tax. Further, the maximum amount of exemption was limited to six months� leave salary, calculated on the basis of average salary drawn during the 10 months immediately preceding his retirement or Rs. 30,000, whichever was less.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.18 This limit applicable to non-Government employees was required to be raised as a result of the higher amount getting exemption in the case of Central Government employees as a result of the recommendations of the Fourth Pay Commission. To achieve this objective and also to rationalise the provisions, the Amending Act, 1987 has made the following amendments in the said sub-clause (ii) :�

(i) The maximum amount that would now be exempt is the equivalent of 8 months� leave salary instead of six months� leave salary as was the case under the old provisions.

(ii) The maximum limit of exemption, namely, Rs. 30,000, is not specified in the sub-clause. Instead, it is now provided that the limit may be specified by the Central Government by way of a notification in the Official Gazette having regard to the limit applicable to the Central Government employees. This would avoid frequent changes in the Income-tax Act for the same reasons as explained in the case of amendment of clause (10) relating to gratuities [refer para 3.11 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.19 The old clause (10AA) also had four provisos similar to the four provisos in clause (10) relating to the gratuities. The Amending Act, 1987 has made consequential changes in the first and second provisos and has omitted the third and fourth provisos of clause (10AA) for the same reasons as was done in the case of four provisos of clause (10) [refer paras 3.12 and 3.13 ante]. The Amending Act, 1987 has also omitted clause (ii) of the Explanation to sub-clause (ii) of clause (10AA), which defined the term �salary� as the definition is now given in the Explanation at the end of clause (10) for purposes of both the clauses (10) and (10AA) [refer para 3.14 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.20 Since the amendments to clause (10AA) were necessitated as a result of the recommendations of the Fourth Pay Commission in the case of Central Government employees, which became effective from 1-7-1986, the said amendments have also been made effective retrospectively from 1-7-1986.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of compensation received by a workman under the �Industrial Disputes Act, 1947�, etc. [clause (10B)]

3.21 Under the old provisions of clause (10B), compensation received by a workman under the Industrial Disputes Act, 1947 or under any other Act or an award or contract of service or otherwise at the time of retrenchment was exempt subject to a maximum of the compensation allowable under the Industrial Disputes Act, 1947 or Rs. 50,000 whichever was less. This limit of Rs. 50,000 mentioned in the clause was Rs. 20,000 earlier, but was raised to Rs. 50,000 by the Finance Act, 1985. Thus, to enhance the limit every time, an amendment of the Act would have been necessary.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.22 To avoid frequent amendments of the Act, the Amending Act, 1987 has amended clause (10B) to provide that the amount of compensation exempt under this clause shall not exceed,�

(i) the amount calculated in accordance with the provisions of the Industrial Disputes Act, 1947, or

(ii) such amount, not being less than Rs. 50,000, as the Central Government may, by notification in the Official Gazette, specify in this behalf, whichever is less.

Thus, under the amended clause, whenever the exemption limit of Rs. 50,000 is to be enhanced, it can be done by a notification.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the provisions relating to exemption of allowances, etc., granted to the employees [clause (14) of section 10] and definition of �income� [clause (24) of section 2]

3.23 Under the old provisions of clause (14), any allowance or benefit, not being in the nature of entertainment allowance or other perquisite within the meaning of section 17(2), specifically granted by an employer to an employee to meet expenses wholly, necessarily and exclusively incurred in the performance of the duties of his office or employment of profit, was exempt from tax to the extent such expenses were actually incurred for that purpose. An Explanation to this clause clarified that any allowance granted to an assessee to meet his personal expenses at the place of his posting or at the place where he ordinarily resided shall not be exempt under this clause. This was to secure that allowances like the city compensatory allowance should continue to be taxed, along with salary, in the hands of the employees. However, in spite of these provisions, the Madhya Pradesh High Court held in the case ofBishambar Dayal v. CIT [1976] 103 ITR 813, that the city compensatory allowance can neither be regarded as salary nor as perquisite and hence cannot be taxed under the head �Salaries�. Following this decision, some of the appellate authorities also held that, apart from the city compensatory allowance, dearness allowance and additional dearness allowance were exempt from tax. The Calcutta High Court also held that the city compensatory allowance is not an item of income, and therefore, not taxable at all – CIT v. R.R. Bajoria [1988] 169 ITR 162. Since it was never the intention of the Government that allowances like the city compensatory allowance, dearness allowance, or the additional dearness allowance should be exempt from tax, necessary amendments have been made to clause (14) of section 10 by the Amending Act, 1987 and to the definition of �income� contained in clause (24) of section 2 by the Amending Act, 1989. These are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.24 The Amending Act, 1987 has substituted a new clause (14) for the old clause in section 10. The amendments made are as follows:-

(i) The new clause (14) now consists of two sub-clauses (i) and (ii). The Explanation in the old clause (14) has been omitted, as its provisions have been incorporated in sub-clause (ii) of the new clause (14).

(ii) Sub-clause (i) of the new clause contains the provisions of the old clause (14) relating to the exemption of special allowance or benefit granted to the employees to meet the expenses incurred in the performance of their duties. It further provided that only those allowances and benefits will be exempt which the Central Government may specify by notification in the Official Gazette.

(iii) Sub-clause (ii) of the new clause provides that any allowance granted to an assessee, either to meet his personal expenses at the place of his posting or at the place where he ordinarily resides or to compensate him for the increased cost of living, will be exempt only if the Central Government specifies them by notification in the Official Gazette.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.25 The Amending Act, 1989 has amended clause (24) of section 2. Allowances and benefits, which are mentioned in section 10(14), have been included in the definition of �income� by using the same language as is used in section 10(14). The amendment has been made retrospectively from 1-4-1962.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.26 The combined effect of the substitution of the new clause (14) in section 10 of the Income-tax Act by the Amending Act, 1987 and the amendment of the definition �income� contained in section 2(24) of the Income-tax Act by the Amending Act, 1989, is that all allowances and benefits granted to the employees will first be treated as income in their hands, but those allowances and benefits which are intended to be exempt from tax will be specified in the notification to be issued under section 10(14).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.27 It may be mentioned that the following notifications have so far been issued under the new clause (14) of section 10 to exempt various allowances and benefits :�

(i) Under sub-clause (i) of clause (14) :

(1) Notification No. S.O. 143(E) dated 21-2-1989, which exempts the travelling allowance and daily allowance while on tour or transfer.

(2) Notification No. G.S.R. 606(E) dated 9-6-1989, which exempts the conveyance allowance.

(ii) Under sub-clause (ii) of clause (14):

Notification No. S.O. 144(E) dated 21-2-1989, which exempts the following allowances to the extent mentioned therein:�

(1) Composite hill compensatory allowance,

(2) Any special compensatory allowance in the nature of border area allowance, disturbed area allowance, etc.

(3) Tribal area allowance.

(4) Any allowance granted to an employee working in any transport system to meet his personal expenditure during his duty of running such transport.

(5) Children educational allowance.

(6) Any allowance granted to an employee to meet the hostel expenditure on his child.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.28 If it is felt that any other allowance or benefit granted to the employee should be exempt from tax, it can be specified in a notification to be issued under section 10(14). Since allowances like the city compensatory allowance, dearness allowance and additional dearness allowance have not been notified under section 10(14), they would be taxable as income of the recipients under the amended provisions of section 2(24).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of provisions relating to exemption of interest, etc., on Government securities, bonds, annuity certificates, savings certificates and deposits [clause (15)]

3.29 Under the old provisions of sub-clauses (i), (ia), (ib), (ii) and (iia); the following were exempt from tax :�

(i) Monthly payment on 15-Year Annuity Certificates of the Central Government or other annuity certificates notified by the Central Government in this behalf [sub-clause (i)]

(ii) Annual payment of National Defence Gold Bonds, 1980 [sub-clause (ia)]

(iii) Premium on the redemption of Special Bearer Bonds, 1991 [sub-clause (ib)].

(iv) Interest on various savings certificates mentioned in the sub-clause and interest on deposits in post office savings bank account, etc. [sub-clause (ii)]

(v) Interest on fixed deposits under any scheme framed and notified by the Central Government in this behalf [sub-clause (iia)].

These sub-clauses were inserted and also amended from time to time, as and when the Government floated certain securities or bonds or savings certificates, etc., to exempt from tax interest or any other income therefrom.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.30 The Amending Act, 1987 has omitted all these sub-clauses and replaced them by a single clause (i), which provides exemption in respect of income by way of interest, premium on redemption or other payment on such securities, bonds, annuity certificates, savings certificates, other certificates issued by the Central Government and deposits as the Central Government may, by notification in the Official Gazette, specify in this behalf. The exemption will be subject to such conditions and limits as may be specified in the said notification. As a result of this amendment, whenever the Central Government wants to exempt income from any new security, bond, certificate, deposit, etc., it need not amend the Act. The purpose will be served by the issue of a notification in this behalf.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Merger of clauses (17A), (17B) and (18) into a single new clause (17A) and also simplification and rationalisation of the provisions of these clauses

3.31 Clauses (17A), (17B) and (18) provided for exemption in respect of the following :�

(i) Any payment, whether in cash or in kind, in pursuance of awards for literary, scientific or artistic work, or for alleviating the distress of the poor, the weak and ailing or for proficiency in sports and games, instituted by the Central Government or by any State Government or approved by the Central Government in this behalf [clause (17A)].

Proviso to this clause clarified that the approval granted by the Central Government shall have the effect for such assessment year or years as may be specified in the order of approval.

(ii) Any payment, whether in cash or in kind, as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in the public interest [clause (17B)].

(iii) Any payment, whether in cash or in kind, by the Central Government or any State Government in pursuance of gallantry awards instituted or approved by the Central Government [clause (18)].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.32 The purposes of the three clauses were similar, i.e., to exempt from tax various awards and rewards given by the Central Government or State Governments or those approved by the Central Government in this behalf. The Amending Act, 1987 has, therefore, merged these clauses into a single new clause (17A). Also, there is no need to specify the purposes of these awards, because once these are given by the Central Government or a State Government or are approved by the Central Government, it can safely be presumed that such an award or reward would be for a genuine cause and would be in the national or public interest. Therefore, the purposes of the awards or rewards are not mentioned in the new clause (17A), which provides that the following payments made, whether in cash or in kind, will be exempt:�

(i) Those in pursuance of any award instituted in public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government in this behalf.

(ii) Those given as a reward by the Central Government or any State Government for such purposes as may be approved by the Central Government in this behalf in public interest.

As a result of these amendments, there is no need now to mention in the Act the various awards and rewards granted or instituted by the Central or State Governments or to mention their purposes.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omissions of clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) by the Amending Act, 1987 and their restoration, with adequate safeguards against misuse, by the Amending Act, 1989

3.33 The Amending Act, 1987 omitted the following clauses of section 10:�

(i) Clause (21), which exempted the income of a scientific research association.

(ii) Clause (23), which exempted the income of a sports association or institution.

(iii) Sub-clauses (iv) and (v) of clause (23C) which exempted the income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution.

The provisions of these clauses, after incorporating appropriate amendments, along with modified provisions of sections 11 to 13, were contained in a new section 80F inserted by the Amending Act, 1987. However, following representations in this regard, the Amending Act, 1989 has omitted the new section 80F and has restored back the said clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) of section 10 (refer items 1, 2 and 6 of the Table given in para 2.4 ante).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

The Amending Act, 1989 has further substituted new clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) with effect from 1-4-1990

3.34 The new clauses and sub-clauses contain adequate safeguards against the misuse of exemptions provided therein. These are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Provisions of the new clause (21) relating to exemption of income of a scientific research association

3.35 The new clause (21) exempts the income of a scientific research association, which is approved for the purposes of clause (ii) of sub-section (1) of section 35. However, the exemption is subject to the following conditions:�

(i) The association should apply its income or accumulate it for application wholly and exclusively to the objects for which it is established. Provisions of sub-sections (2) and (3) of section 11, with appropriate amendments, shall apply to such accumulations.

(ii) The association should not have invested or deposited its funds (other than voluntary contributions received and maintained in the form of jewellery, furniture or any other article, as notified in the Official Gazette by the Board) during the previous year otherwise than in any one or more of the forms specified in section 11(5).

(iii) The exemption shall not apply to any income of the association being profits and gains of business, unless the business is incidental to the attainment of its objectives and separate books of account are maintained in respect of such business.

Note: The other conditions regarding making of an application for exemption to the prescribed authority, enquiry by the prescribed authority before granting the approval and the period for which the exemption can be granted have been incorporated by the amendments made to section 35 relating to allowance of expenditure on scientific research from income from business or profession [refer para 5.4 in these explanatory notes].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Provisions of the new clause (23) relating to exemption of income of a sports association or institution

3.36 The new clause (23) exempts the income of an association or institution established in India, which may be notified in the Official Gazette by the Central Government, having regard to the fact that the association or institution has as its objects, the control, supervision, regulation or encouragement in India to the games of cricket, hockey, football, tennis or such other games or sports as the Central Government may, by notification in the Official Gazette, specify in this behalf. However, the exemption is subject to the following conditions :�

(i) The conditions regarding application of income, investment of funds in assets specified in section 11(5) and income from business are essentially the same as those in the case of clause (21) relating to scientific research associations, which have been enumerated at Sl. Nos. (i) to (iii) in the preceding para.

It is, however, provided in this clause that if any funds invested or deposited before 1-4-1989 in any form or mode other than that specified in section 11(5) are invested or deposited in the form or mode specified in section 11(5) by 30-3-1990, the exemption under this clause shall not be denied in respect of such funds.

(ii) The association or institution should not distribute any part of its income in any manner to its members except as grants to any association or institution affiliated to it. [This condition was also there in the old provisions of the clause].

(iii) The association or institution should make an application in the prescribed form and manner to the prescribed authority for the purposes of grant of such exemption or continuance thereof.

(iv) Before notifying the association or institution for the purposes of exemption under this clause, the Central Government may, for satisfying itself about the genuineness of the activities of the association or institution, call for such documents (including audited annual accounts) or information from the association or institution as it thinks necessary. The Government may also make such enquiries as it may deem necessary in this behalf.

(v) The notification granting exemption under this clause shall, at any one time, have effect for not more than three assessment years (including an assessment year or years commencing before the date of issue of such notification), as may be specified in the notification.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Provisions of the new sub-clauses (iv) and (v) of clause (23C) relating to exemption of income of a notified charitable fund or institution or a notified wholly public religious or a wholly public religious and charitable trust or institution

3.37 The new sub-clauses (iv) and (v) of clause (23C) empower the Central Government to notify in the Official Gazette�

(a) any fund or institution established for charitable purposes, having regard to its objects and importance throughout India or throughout any State or States; and

(b) any trust or institution, which is either wholly for public religious purposes or wholly for public religious and charitable purposes, having regard to the manner in which its affairs are administered and supervised to ensure that its income is properly applied for the purposes thereof,

for the purposes of exempting the income of such fund, institution or trust.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.38 Thus, the main provisions of the said new sub-clauses (iv) and (v) of clause (23C) are essentially the same as those of the old sub-clauses (iv) and (v). However, a number of conditions have been laid down in the new sub-clauses (iv) and (v) which must be satisfied before exemption under these sub-clauses can be granted or continued. Thus, while there was only one proviso to the old sub-clauses (iv) and (v), which provided that the notification issued under those clauses shall have effect for such assessment year or years as is specified in the notification, there are six provisos to the new sub-clauses (iv) and (v), which lay down various conditions.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.39 The conditions laid down for grant of exemption or continuation thereof under the said sub-clauses (iv) and (v) are essentially the same as those in the case of clause (23) relating to sports associations, which have been enumerated at Sl. Nos. (i) to (v) in para 3.36 ante, with the following difference :�

(i) The provisions of sub-sections (2) and (3) of section 11 are not made applicable to the accumulation of income by institutions, etc., exempt under sub-clauses (iv) and (v) of clause (23C), while they are applicable in the case of institutions exempt under clause (23) and also clause (21). The effect is that while scientific research and sports institutions and associations exempt under clauses (21) and (23) can accumulate, for application to their purposes, only 25% of their income without any time-limit and without fulfilling any conditions and the balance 75% for a period of 10 years after complying with certain requirements mentioned in section 11(2), there is no such embargo in the case of religious or charitable institutions, etc., exempt under sub-clauses (iv) and (v) of clause (23C). The latter can accumulate any amount out of income for application to their objects for any period of time and without having to comply with the requirements mentioned in section 11(2). The only restriction is that such accumulation must be invested in assets specified in section 11(5) and should be for the purposes connected with the objects of the institutions, etc.

(ii) Being of charitable and/or religious nature, the condition mentioned at Sl. No. (ii) in para 3.36 antein the case of clause (23) is not applicable in the case of sub-clauses (iv) and (v) of clause (23C).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.40 It may be noted that while under the old provisions of the said sub-clauses (iv) and (v), a notification could have effect for any number of assessment years mentioned therein, under the new provisions the notification shall not have effect, at any one time, for more than three assessment years.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Prescribed authority for the purposes of clause (21) read with section 35, clause (23) and sub-clauses (iv) and (v) of clause (23C)

3.41 The prescribed authority for the purposes of clause (21) read with section 35 shall be the Director-General (Income-tax, Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India. [Refer new rule 6 substituted by the Income-tax (Eighth Amendment) Rules, 1989, issued under Notification No. S.O. 669 (E) dated 23-8-1989].

The prescribed authority for the purposes of clause (23) and sub-clauses (iv) and (v) of clause (23C) shall be the Director-General (Income-tax, Exemptions). [Refer new rule 2C inserted by the Income-tax (Ninth Amendment) Rules, 1989, issued under Notification No. S.O. 675(E) dated 28-8-1989].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

3.42 These amendments (except the amendments indicated below) come into force with effect from 1st April, 1989 and will, accordingly, apply to the assessment year 1989-90 and subsequent assessment years.

The following amendments, however, come into force from the dates mentioned against them:

(i) Amendments to clause (10AA) of section 10, as indicated in paras 3.18 to 3.20 ante, come into force retrospectively with effect from 1st July, 1986.

(ii) Amendments to section 2(24) by the Amending Act, 1989, as indicated in para 3.25 ante, come into force retrospectively with effect from 1st April, 1962.

(iii) Substitution of new clauses (21) and (23) and new sub-clauses (iv) and (v) of clause (23C) in section 10, as indicated in paras 3.34 to 3.40, shall come into force with effect from the 1st April, 1990.

[Clauses (a) to (l) of section 6 of the Amending Act, 1987]

[Sub-clause (ii) of clause (a) of section 2, clauses (c), (d) and (e) of section 4 and clause (b) of section 95 of the Amending Act, 1989].

TAX TREATMENT OF CHARITABLE ANd RELIGIOUS
TRUSTS, INSTITUTIONS, ETC.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sections 11,12,12A and 13 by the Amending Act, 1987 and their restoration by the Amending Act, 1989

4.1 The Amending Act, 1987 omitted the following sections of the Income-tax Act:

(i) Section 11, which exempted the income of charitable and religious trusts, institutions, etc., subject to fulfilment of certain conditions.

(ii) Section 12, which dealt with voluntary contributions received by religious or charitable trusts and institutions.

(iii) Section 12A, which laid down conditions for application of the provisions of sections 11 and 12.

(iv) Section 13, which enumerated the cases and circumstances in which the provisions of sections 11 and 12 did not apply.

The provisions of these sections, after certain modifications, were incorporated in a new section 80F inserted by the Amending Act, 1987. However, following representations in this regard, the Amending Act, 1989 has omitted the said new section 80F and has restored back sections 11,12,12A and 13 [refer items 3 and 6 of the Table given in para 2.4 ante]. The Amending Act, 1989 has further made certain modifications in section 11, which are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment to sub-section (1) of section 11 by the Amending Act, 1989 to exclude corpus donations from the total income of the trust or institution and amendment of definition of �income� contained in section 2(24) by the Amending Act, 1987

4.2 The Amending Act, 1989 has inserted a new clause (d) in sub-section (1) of section 11 to provide that income in the form of voluntary contributions made with a specific direction that they shall form part of the corpus of the trust or institution shall be excluded from the total income of the trust or institution. For understanding the background of this amendment, it will be relevant to discuss the amendment made to the definition of the term �income� in section 2(24) by the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

4.3 Under the old provisions of sub-clause (iia) of clause (24) of section 2 any voluntary contribution received by a charitable or religious trust or institution with a specific direction that it shall form part of the corpus of the trust or institution was not included in the income of such trust or institution. Since this provision was being widely used for tax avoidance by giving donations to a trust in the form of corpus donations so as to keep this amount out of the regulatory provisions of sections 11 to 13, the Amending Act, 1987 amended the said sub-clause (iia) of clause (24) of section 2 to secure that all donations received by a charitable or religious trust or institution, including corpus donations, were treated as income of such trust or institution. However, under the provisions of the new section 80F, also introduced by the Amending Act, 1987, such corpus donations, along with other income of the trust or institution would have been exempt if spent for charitable purposes or invested in specified assets mentioned in section 80F.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

4.4 As already pointed out, the Amending Act, 1989 omitted the new section 80F introduced by the Amending Act, 1987 and revived the old section 11. Consequently, corpus donations to trusts, etc., would also be governed by the provisions of section 11. Since stipulations in clauses (a) and (b) of sub-section (1) of section 11 that 75% of the income of the trust should be spent during the year and only 25% can be accumulated for application to its purposes in future could not have been made applicable to corpus donations, the Amending Act, 1989 has further amended section 11 to exclude corpus donations from the total income of the trust, as explained in para 4.2 above.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

4.5 The effect of the amendment of definition of �income� contained in section 2(24) by the Amending Act, 1987 and the amendment of sub-section (1) of section 11 by the Amending Act, 1989 is that although corpus donations would be treated as income in the hands of the recipient, in the case of trusts or institutions, which comply with the requirements for exemption under section 11, these will be excluded from their income. However, in case the trust or institution loses the exemption under section 11, either by not complying with the conditions laid down in section 12A or by falling within the mischief of section 13, corpus donations will be included in its income and taxed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Consequential amendments in sections 2(24) and 11(1) by the Amending Act, 1989

4.6 The Amending Act, 1989 has also made the following amendments:�

(i) Consequential amendments in the definition of �income� contained in section 2(24) pursuant to the omission of section 80F and revival of clauses (21) and (23) and sub-clauses (iv) and (v) of clause (23C) of section 10.

(ii) Consequential amendments in section 11(1) pursuant to the amendment of sub-section (1) of section 139 and the omission of sub-section (2) of section 139.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to sub-section (5) of section 11 by the Amending Act, 1989, to expand the scope of specified assets for purposes of investment of accumulated income of trusts, etc.

4.7 Sub-section (5) of section 11 enumerates the forms and modes of investing or depositing the money referred to in section 11(2)(b), i.e., 75% of the income of the trust which is accumulated for application to the purposes of the trust in future. The Amending Act, 1989 has amended the said sub-section (5) to expand its scope as follows:-

(i) In place of �Government companies� as defined in section 612 of the Companies Act, 1956, public sector companies have been included in the list of institutions where investments or deposits can be made.

(ii) A new clause (xii) has been inserted which empowers the Central Government to prescribe any other form or mode of investment or deposit for the purposes of this sub-section. Thus, for future expansion of the scope of sub-section (5) of section 11, amendment of the Act will not be necessary. It can be prescribed in the rules.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Clause (j) of section 3 and section 7 of the Amending Act, 1987]

[Sub-clause (i) of clause (a) of section 2, section 5 and clause (c) of section 95 of the Amending Act, 1989].

Expenditure-linked concessions for computing
income from business or profession

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sections 35, 35B, 35C, 35CC, 35CCA and 35CCB by the Amending Act, 1987

5.1 The Amending Act, 1987 omitted the following sections of the Income-tax Act for reasons mentioned against each:�

(i) Section 35 relating to deduction for expenditure on scientific research, as deduction for payments made to scientific research associations was to be allowed under the provisions of section 80G, as amended by the Amending Act, 1987, read with the provisions of the new section 80F, also inserted by the Amending Act, 1987.

(ii) Section 35B relating to weighted deduction in respect of expenditure incurred for promoting exports, as the concessions had already been withdrawn by the Finance Act, 1983, in respect of expenditure incurred after 28-2-1983.

(iii) Section 35C relating to deduction for expenditure on agricultural development, as the concessions had already been withdrawn by the Finance Act, 1984, in respect of expenditure incurred after 28-2-1984.

(iv) Section 35CC relating to deduction for expenditure on an approved programme of rural development as the concessions had already been withdrawn by the Finance Act, 1985, in respect of expenditure on programmes not approved till 16-3-1985.

(v) Sections 35CCA and 35CCB relating to deductions for expenditure by way of payments to associations and institutions for carrying out rural development programmes or programmes of conservation of natural resources, as deductions for such payments were to be allowed under the provisions of section 80G, as amended by the Amending Act, 1987, read with the provisions of the new section 80F, also inserted by the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Restoration of sections 35,35CCA and 35CCB by the Amending Act, 1989

5.2 Following representations against the provisions of the new section 80F and also against the omission of section 35, the Amending Act, 1989 has omitted the new section 80F, has reversed the corresponding amendments to section 80G and has restored back sections 35, 35CCA and 35CCB [refer items 4, 6 and 7 of the Table given in para 2.4 ante]. The Amending Act, 1989 has further amended section 35 to provide adequate safeguards against the misuse of the provisions of that section. These are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 35(1) by the Amending Act, 1989 to provide safeguards against the misuse of the provisions of the section

5.3 Under the old provisions of clauses (ii) and (iii) of sub-section (1) of section 35, any sums paid for research were allowed as deduction from profits and gains of business or profession, if the payments were made to�

(i) a scientific research association which has as its object the undertaking of scientific research or to a university, college or other institution to be used for scientific research;

(ii) a university, college or other institution to be used for research in social science or statistical research related to the class of business carried on.

In both the cases such association, university, college or institution had to be approved by the prescribed authority. The Amending Act, 1989 has amended both the said sub-clauses (ii) and (iii) to provide that such approval by the prescribed authority shall be made by notification in the Official Gazette.

Note: As explained in para 3.41 ante, under the new rule 6 inserted in the Income-tax Rules, the prescribed authority for this purpose shall be the Director-General (Income-tax, Exemptions) in concurrence with the Secretary, Department of Scientific and Industrial Research, Government of India.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

5.4 The Amending Act, 1989 has further inserted three provisos in sub-section (1) of section 35 to provide the following conditions for approval or continuance of approval by the prescribed authority under clauses (ii) and (iii) :�

(i) The scientific research association, university, college or institution should make an application in the prescribed form and manner to the prescribed authority for the purposes of grant of such approval or continuance thereof.

(ii) Before granting the approval, the prescribed authority may, for satisfying itself about the genuineness of the activities of the scientific research association, university, college or institution, call for such documents (including audited annual accounts) or information from the said association, university, college or institution as it thinks necessary. The prescribed authority may also make such enquiries as it may deem necessary in this behalf.

(iii) The notification granting approval, shall at any one time; have effect for not more than three assessment years (including an assessment year or assessment years commencing before the date of issue of such notification), as may be specified in the notification.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Section 10 of the Amending Act, 1987]

[Section 8 and clause (e) of section 95 of the Amending Act, 1989].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Computation of income under the head �Profits and gains of business or profession�

6.1 Under the old provisions of the Income-tax Act, the computation of taxable income under the head �Profits and gains of business or profession� deviated considerably from the concept of commercial profits or real income. This was because of certain provisions in the Act, which disallowed expenses actually incurred or laid down artificial ceilings on allowable business expenses. With a view to bring the taxable income closer to the real income, the Amending Act, 1987 has either amended or omitted some of the provisions of the Act, which put restrictions on the allowability of business expenses. These are indicated below:

(i) Provisions relating to allowability of bonus are amended.

[Sections 36(1)(ii) and 43B]

(ii) Provisions relating to allowability of bad debts are amended.

[Sections 36(1)(vii) and 36(2)]

(iii) Provisions which lay down ceilings on remuneration of directors, in the case of companies, are omitted.

[Section 40(c)]

(iv) Provisions which lay down ceilings on remuneration of employees or former employees are omitted.

[Sections 40A(5) and (6)]

Certain other amendments have also been carried out either to remove the redundant provisions or to rationalise the computation of income from business or profession, such as omission of Explanation 1 to section 28 and section 39 relating to managing agency commission and amendment of section 40A(3) relating to restrictions regarding the manner in which the payments for expenses should be made.

All the above amendments, i.e., amendments to sections 28, 36, 40, 40A, 43B and omission of section 39 are discussed in detail in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of provisions relating to Managing Agency Commission [Explanation 1 to section 28 and section 39]

6.2 The managing agency system having been abolished long back, the provisions in the Income-tax Act regarding managing agency for computing income under the head �Profits and gains of business or profession�, had also lost their relevance. The Amending Act, 1987 has, therefore, omitted the following:

(i) Explanation 1 to section 28, which provided that the profits and gains of business shall include the profits and gains of managing agency.

(ii) Section 39 which provided for the sharing of the managing agency commission by the managing agent with a third party or third parties.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to sections 36(1)(ii) and 43B to rationalise provisions regarding allowability of bonus and commission payments

6.3 The old provisions of clause (ii) of sub-section (1) of section 36 provided for allowance of bonus or commission paid to an employee subject to certain conditions laid down in the two provisos to the said clause (ii). The first proviso laid down the condition that deduction in respect of bonus paid to an employee governed by the Payment of Bonus Act, 1965 shall not exceed the amount of bonus payable under that Act. The second proviso laid down that the amount of bonus in case of employees not governed by the Payment of Bonus Act or the amount of commission should be reasonable with reference to the pay of the employee, the conditions of his service, the profits of the business for the year in question and the general practice in similar business or profession.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

6.4 Instances have occurred where payments to employees governed by the Payment of Bonus Act were made in excess of the statutory amounts for reasons of business expediency. A claim for the balance amount in such cases was generally made under the provisions of section 37(1), which allows all expenses incurred wholly or exclusively for the purposes of business. This led to litigation. The conditions laid down by the second proviso in case of payment of bonus to employees not governed by the Bonus Act or payment of commission also led to protracted litigation on the issue. In order to avoid litigation and uncertainty in the matter and also to bring rationality to the provisions, the Amending Act, 1987 has omitted both the provisos to clause (ii) so that bonus or commission paid by the employer to the employees will be allowed without any restriction. Of course, if unreasonably excessive payments are made to relatives or connected persons, the same can be disallowed under the provisions of section 40A(2).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

6.5 To ensure that the liberalised provisions regarding payment of bonus and commission are not abused, the Amending Act, 1987 has simultaneously restricted the allowability of these payments to the amount actually paid in a particular year by amending section 43B. Thus, a new clause (c) has been inserted in that section to bring bonus and commission payments within its ambit so that deduction is allowed only in the year in which these are actually paid. The first proviso introduced in the section by the Finance Act, 1987 has also been amended so that bonus and commission payments will also be allowed only if the payment in respect thereof is made before the due date of filing the return of income, and the evidence of such payment is attached with such return of income. By inserting Explanation 2 in the section, it has been clarified that if deduction in respect of any bonus or commission payment has already been allowed in the assessment year 1988-89 or any earlier assessment year on due basis, the deduction shall not be allowed again in the year in which the same is actually paid.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to sections 36(1)(vii) and 36(2) to rationalise provisions regarding allowability of bad debts

6.6 The old provisions of clause (vii) of sub-section (1) read with sub-section (2) of the section laid down conditions necessary for allowability of bad debts. It was provided that the debt must be established to have become bad in the previous year. This led to enormous litigation on the question of allowability of bad debt in a particular year, because the bad debt was not necessarily allowed by the assessing officer in the year in which the same had been written off on the ground that the debt was not established to have become bad in that year. In order to eliminate the disputes in the matter of determining the year in which a bad debt can be allowed and also to rationalise the provisions, the Amending Act, 1987 has amended clause (vii) of sub-section (1) and clause (i) of sub-section (2) of the section to provide that the claim for bad debt will be allowed in the year in which such a bad debt has been written off as irrecoverable in the accounts of the assessee.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

6.7 Clauses (iii) and (iv) of sub-section (2) of the section provided for allowing deduction for a bad debt in an earlier or later previous year, if the Income-tax Officer was satisfied that the debt did not become bad in the year in which it was written off by the assessee. These clauses have become redundant, as the bad debts are now being straightaway allowed in the year of write off. The Amending Act, 1987 has, therefore, amended these clauses to withdraw them after the assessment year 1988-89.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 36(1)(viia) to include definition of �scheduled bank� therein

6.8 Under the provisions of clause (viia) of sub-section (1) of the section, deduction is allowed to scheduled as well as non-scheduled banks in respect of provisions for bad and doubtful debts relating to rural advances. Clause (ii) of the Explanation to this clause defined �scheduled bank� to have the same meaning as in the Explanation to section 11(5)(iii). Since the Amending Act, 1987 omitted section 11, the definition of �scheduled bank�, as given therein, has been shifted and incorporated in the Explanation to section 36(1)(viia) itself. It has further been clarified that �scheduled bank� does not include a co-operative bank. This definition of �scheduled bank� stays in section 36(1)(viia) in spite of the fact that section 11 containing the definition of �scheduled bank� has been revived by the Amending Act, 1989.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 40 relating to certain amounts not deductible in computing the income under the head �Profits and gains of business or profession�

6.9 The provisions of this section dealt with amounts not deductible in computing the income chargeable under the head �Profits and gains of business or profession�. The Amending Act, 1987 has made the following amendments in this section:-

(i) Consequential amendments made in the opening portion of the section pursuant to the omission of section 39.

(ii) Substitution of clause (b) which disallows payment of interest, salary, etc., by a firm to its partners, by two new clauses (b) and (ba) is discussed in the later portion of these explanatory notes under the head �New scheme of assessment of association of persons and body of individuals� [refer paras 11.4 and 11.5 of these explanatory notes].

(iii) Under the provisions of clause (c) of the section, a ceiling was imposed on the remuneration and perquisite paid by a company to its directors and certain connected persons. This clause has been omitted, so that the artificial ceiling is now removed. Even otherwise there was not much rationale for this ceiling, as a company can pay such remuneration, etc., only after getting the approval of the Company Law Board. However, if the remuneration paid is excessive or unreasonable having regard to the services rendered by the directors or the connected persons, the same can still be disallowed under the provisions of section 40A(2).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment to section 40A(3) relating to mode of payment for expenses

6.10 The old provisions of sub-section (3) of the section required payments in respect of expenditure, which exceeded Rs. 2,500, to be made by a crossed cheque or a crossed bank draft. On failure to do so, the payments made were disallowed in the computation of income. In order to remove hardship to smaller assessees, the Amending Act, 1987 has raised this ceiling to Rs. 10,000.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sub-sections (5) and (6) of section 40A

6.11 Sub-section (5) of the section laid down ceilings on the remuneration and perquisites paid by any assessee to its employees or former employees. Sub-section (6) laid down the ceiling up to which any expenditure by way of fees for services rendered by a person, who at any time during the period of 24 months immediately preceding the previous year was an employee of the assessee, could be allowed. The Amending Act, 1987 has omitted both these sub-sections. Consequently, the artificial ceilings laid down on the remuneration or fees payable to employees or former employees of an assessee are removed. However, if excessive or unreasonable payments are made to relatives or connected persons, the same can still be disallowed under the provisions of section 40A(2).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Clause (b) of section 9 and sections 11 to 15 of the Amending Act, 1987].

Provisions Relating to Clubbing of Income of Spouse, Minor Child, Son�s Wife and Son�s Minor Child with Assessee�s Income

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Certain amendments to section 64(1) by the Amending Act, 1987 which have been withdrawn by the Amending Act, 1989

7.1 Sub-section (1) of section 64 lays down various circumstances under which the income of family members, namely spouse, minor child, son�s wife and son�s minor child are clubbed with the income of the assessee. The Amending Act, 1987 made the following amendments to the said sub-clause (1) :�

(i) Omission of clauses (i) and (iii) and other consequential amendments pursuant to the new scheme of assessment of firms and partners – Clauses (i) and (iii), which provided for clubbing of the share income of the spouse or minor child from a firm with the assessee�s income, were omitted, as the provisions of these clauses became redundant in view of the new scheme of assessment of firm and partners, which also was introduced by the Amending Act, 1987. Pursuant to the omission of the said clauses (i) and (iii), consequential amendments were also made in clauses (iv) and (v) andExplanations 1 and 3. Further, Explanations 1A and 2A, which related to the said clauses (i) and (iii), were also omitted.

(ii) Amendment of clause (ii) – Clause (ii) provides that the income derived by the spouse of an individual by way of remuneration, etc., from a concern in which the individual has a substantial interest shall be clubbed with the income of the said individual. A provision to this clause, however, provided that the said clause shall not apply where the spouse possessed technical or professional qualifications. The Amending Act, 1987 substituted this provision by a new proviso, which provided that the said clause shall not apply only where the remuneration, etc., was received by the spouse from a firm carrying on profession, referred to in section 44AA(1) and the spouse possessed any technical or professional qualification in the nature of a degree or diploma of a university.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

7.2 Following representations against the new scheme of assessment of firm and partners and also against the provisions of the new proviso to clause (ii) of section 64(1), the amending Act, 1989 has withdrawn the new scheme of assessment of firm and partners and the new proviso to clause (ii) of section 64(1). Consequently, all the amendments to section 64(1), as mentioned in the preceding para, have been reversed [refer item 6 of the Table given in para 2.3 ante]. Thus, the old provisions of clauses (i),(ii) and (iii) of section 64(1) along with Explanations 1A and 2A have been restored.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Other amendments to section 64(1) by the Amending Act, 1987 which have not been withdrawn by the Amending Act, 1989

7.3 (i) Amendments to clauses (v) and (vii) – Clause (v) provides for clubbing of the income from assets transferred to the minor child with the income of the individual transferring the assets. Clause (vii) deals in a similar way with the assets transferred to any person or association of persons for the benefit of the spouse or minor child. Under the old provisions of the said clauses (v) and (vii), the term �minor child � was qualified by the words �not being a married daughter�. Since the use of these words was considered unnecessary, because of the requirement of the relevant law laying down the minimum age for marriage, the Amending Act, 1987 has omitted the same from both the clauses.

(ii) Substitution of new Explanation 3 – Under the old provisions of Explanation 3, which applied to clauses (iv) and (v) of sub-section (1) of section 64, it was clarified that where the assets transferred by an individual to his spouse or minor child were invested in any business, the income proportionate to the investment out of transferred assets would be clubbed with the income of the transferor. The Amending Act, 1987 has substituted a new Explanation 3, which, in addition to clauses (iv) and (v), also applies to clause (vi) relating to assets transferred by an individual to his son�s wife or son�s minor child, so that, where such transferred assets are invested in any business, proportionate income therefrom would also be clubbed with the income of the transferor. This amendment has removed a lacuna in the old provisions of Explanation 3.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Section 17 of the Amending Act, 1987]

[Section 11 and clause (g) of section 95 of the Amending Act, 1989].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Deductions to be made in computing total income

8.1 Chapter VIA of the Income-tax Act deals with deductions to be made in computing total income. This Chapter contains a number of sections (sections 80A to 80U) which provide for different types of deductions from total income to achieve various objectives, such as promotion of savings, exports, industrial growth, scientific research, charity, etc. The Amending Act, 1987 has amended or omitted some of the sections of this Chapter. A new section 80F inserted by the Amending Act, 1987 has, however, been omitted by the Amending Act, 1989. All these amendments are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 80A, containing general principles regarding deductions allowable under Chapter VIA, by the Amending Act, 1987 and their reversal by the Amending Act, 1989

8.2 Under the old provisions of sub-section (3) of section 80A, where deductions under certain sections of Chapter VIA, mentioned in the said sub-section (3), were allowed in the case of a firm, association of persons or body of individuals, the same deductions would not be allowed in the assessment of the partners or members in respect of shares from such firm, association or body. The Amending Act, 1987 substituted a new sub-section (3) after making the following amendments:

(i) Reference to a firm and its partners was omitted from the new sub-section (3), as under the new scheme of assessment of firm and partners introduced by the Amending Act, 1987, such a reference was not necessary in the said sub-section (3).

(ii) Since section 80T had already been omitted by the Finance Act, 1987 and sections 80GGA and 80QQ were being omitted by the Amending Act, 1987, references to these sections were omitted from the new sub-section (3).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

8.3 The Amending Act, 1989 has withdrawn the new scheme of assessment of firm and partners and has also restored section 80GGA. The Amending Act, 1989 has, therefore, withdrawn the above amendments to sub-section (3) of section 80A made by the Amending Act, 1987, except omission of references to sections 80QQ and 80T [refer item 10 of the Table given in para 2.3 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of certain �definitions� from Chapter VIA [amendment of section 80B]

8.4 The Amending Act, 1987 has omitted the following definitions from section 80B:

(i) Definitions of �domestic company� and �foreign company�, as both these definitions have been shifted to section 2 by the Amending Act, 1987. Consequently, these definitions will now be valid for the purposes of the entire Income-tax Act, instead of for Chapter VIA only.

(ii) Definitions of �income� in relation to a handicapped individual and �relative�, as both these definitions are no longer necessary. These definitions were needed for the purposes of the old section 80D dealing with deduction in respect of medical treatment of handicapped dependents, which was omitted by the Finance Act, 1984.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sections 80E and 80QQ

8.5 The Amending Act, 1987 has omitted the following sections for reasons mentioned against them:

(i) Section 80E, which provided for deduction in respect of payments for securing retirement annuity in the case of a partner of a registered professional firm, as the provisions of the section had already become redundant. The Finance Act, 1984 had amended this section to provide that payments made after 29-2-1984 would not qualify for deduction under this section.

(ii) Section 80QQ, which provided for deduction in respect of profits and gains from the business of publication of books, as the provisions of the section had already become redundant. The provisions of the sections were applicable to the assessment year 1971-72 and subsequent 14 assessment years, i.e., only up to the assessment year 1985-86.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of new section 80F by the Amending Act, 1987 and its omission by the Amending Act, 1989

8.6 The Amending Act, 1987 inserted a new section 80F in the Income-tax Act containing a unified scheme for tax treatment of charitable and religious trusts and institutions and also institutions of national importance, including those involved in scientific research, sports, rural development and conservation of natural resources. However, following representations against the provisions of the new section 80F, the Amending Act, 1989 has omitted the same. [Refer item 6 of the Table given in para 2.4ante and also paras 3.33, 4.1, 5.1 and 5.2 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 80G by the Amending Act, 1987 and reversal of most of the amendments by the Amending Act, 1989

8.7 Section 80G provides for deduction in respect of donations to certain funds and charitable institutions, while computing the total income of an assessee. The Amending Act, 1987 made the following amendments in this section:�

(i) Consequent upon the omission of clauses (21), (23) and sub-clauses (iv) and (v) of clause (23C) of section 10 and sections 11 to 13 and their replacement by a new section 80F, amendments were also made in section 80G to bring the provisions of this section in line with those of the new section 80F. Further, consequent upon the omission of sections 35, 35CCA, 35CCB and 80GGA, the provisions of those sections, with appropriate amendments, were also incorporated in section 80G. For these purposes amendments were carried out in sub-sections (1), (2) and (5) and Explanation 2of the section.

(ii) Sub-section (4) lays down the ceiling up to which certain donations mentioned in sub-section (2) of the section can qualify for deduction. Under the old provisions of the sub-section, this ceiling was 10% of the gross total income or Rs. 5 lakhs, whichever was less. A new sub-section (4) has been substituted, which does not contain the ceiling of Rs. 5 lakhs. The effect is that the aforesaid donations will now be subject to only one upper limit, i.e., 10% of the gross total income.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987

8.8 Following representations against the provisions of the new section 80F, the Amending Act, 1989 has omitted the new section 80F and has revived the old sections 10(21), 10(23), 10(23C)(iv) and (v) and 11 to 13 with certain modifications mentioned in paras 3.35 to 3.41 and 4.2 to 4.7. Consequently, the Amending Act, 1989 has also reversed the amendments made to various sub-sections and Explanation 2 to section 80G, as detailed at Sl. No. (i) in the preceding para. The Amending Act,1989 has also revived section 35 with suitable modifications and sections 35CCA, 35CCB and 80GGA. [Refer items 6, 7 and 8 of the Table given in para 2.4 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987

8.9 The net effect is that only the amendment made to sub-section (4) of section 80G, as described at Sl. No. (ii) of para 8.7 ante, survives.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of section 80GGA by the Amending Act, 1987 and its restoration by the Amending Act, 1989

8.10 The Amending Act, 1987 omitted section 80GGA, which provided for deduction in respect of certain donations for scientific research or rural development or conservation of natural resources, as its provisions were incorporated in the amended section 80G read with the new section 80F. However, as explained in para 8.8 ante, following the omission of the new section 80F and the reversal of the amendments to section 80G, the Amending Act, 1989 has also restored the old section 80GGA.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987

8.11 These amendments come into force with effect from 1st April, 1989 and will, accordingly, apply to the assessment year 1989-1990 and subsequent assessment years.

[Clauses (h) and (i) of section 3, sections 21 to 26 and 28 of the Amending Act, 1987]

[Sub-clause (b) of clause (1) of section 57 and clauses (g) and (h) of section 95 of the Amending Act, 1989].

Powers of Income-tax Authorities

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the provisions conferring powers of a civil court in certain matters on the income-tax authorities [section 131]

9.1 Under the old provisions of sub-section (1A) of section 131, the powers of a civil court in certain matters like enforcing attendance of witnesses and examining them on oath, compelling the production of books of account and documents, etc., which are normally exercised by the Assessing Officers and appellate or revisionary authorities under the provisions of sub-section (1), were also conferred on an Assistant Director of Inspection, who generally deals with searches and seizures, and enabled him to exercise the powers even when no proceedings were pending. However, these powers were not available to the Directors and Deputy Directors, who are generally associated with investigation of cases and intelligence work in connection with searches and seizures under section 132. Another difficulty felt was that an authorised officer could record a statement on oath only during the course of search under the provisions of section 132(4). Sometimes it becomes necessary to record a preliminary statement before the commencement of the search for proper investigation. This was not possible, as the Courts had held that such a preliminary statement before the search could not be recorded under the provisions of section 132(4).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.2 To overcome these difficulties, the Amending Act, 1987 has amended the said sub-section (1A) to extend similar powers to the Director-General or Director. As per the new definition of �Director-General or Director� in section 2(21), the term also includes a Deputy Director and an Assistant Director. Thus, the powers have been extended to the Director-General, Director, Deputy Director and the Assistant Director. The Amending Act, 1987 has further extended the powers to an authorised officer under sub-section (1) of section 132 before he takes search and seizures action under clauses (i) to (v) of that sub-section.

Note 1 : The Finance Act, 1988 has further amended the said sub-section (1A) to�

(i) specially mention Deputy Director and Assistant Director also in the sub-section, leaving no doubt in the matter;

(ii) provide that these amendments of the sub-section would come into effect from 1-6-1988.

[Clause (a) of section 33 and clause (a) of section 88 of the Finance Act, 1988]

Note 2 : For further amendments to section 131 by the Finance Act, 1988, refer para 33.2 of the explanatory notes on the Finance Act, 1988 [Circular No. 528].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.3 The old provisions of sub-section (2) of section 131 provided for imposition of fine on a person for non-compliance with a summons issued under this section. Consequent upon the inclusion of this penal provision in section 272A dealing with miscellaneous penalties, the Amending Act, 1987 has omitted the said sub-section (2).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to search and seizure [section 132]

9.4 Section 132 deals with search and seizure. Sub-sections (1) and (1A) of this section empowered the authorised officer, who is conducting the search, to seize the books of account, documents, money, bullion, jewellery or other valuable articles or things found during the search, if the same are unaccounted for. The Amending Act, 1987 has made amendments ofconsequential nature in these sub-sections pursuant to the changes in the designations and jurisdiction of income-tax authorities.

Note : The Finance Act, 1988 has further clarified that these amendments would come into force with effect from 1-4-1988.

[Clause (b) of section 88 of the Finance Act, 1988].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.5 Sub-section (3) empowers the authorised officer to issue a prohibitory order on a person in control of books of account, documents, valuable articles, etc., directing him not to remove, part with or otherwise deal with them without his permission, if he finds it not practicable to seize them. It is clearly the intention of the Government that the issue of such a prohibitory order does not amount to seizure. However, various High Courts have differed on the point as to whether the issue of a prohibitory order under sub-section (3) amounts to seizure or not. While the Punjab and Delhi High Courts held that it did not amount to seizure – O.P. Jindal v. CIT [1976] 104 ITR 389 and Mrs. Kanwal Shamsher Singh v.Union of India [1974] 95 ITR 80, The Bombay High Court held in a case that the effect of the prohibitory order under section 132(3) is in essence to bring out a seizure of articles and things and so it would amount to seizure – N.M.R. Gillani v. CIT 1976 Tax LR 688. In order to put an end to the controversy arising out of the difference of judicial pronouncement and to make the intention of the Government clear, the Amending Act, 1987 has inserted an Explanation to sub-section (3) to clarify that a prohibitory order under this sub-section does not amount to seizure.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.6 Further, there is no time limit up to which such a prohibitory order can be in force. This causes inconvenience to the assessee, as the authorised officer can keep the books of account, documents, valuable articles, etc., under prohibitory order for an indefinite period and there is no recourse left to the person, if the prohibitory order continues for an unduly long period. Several Courts have held that the absence of mention of time limit in section 132(3) does not mean that the authorised officer can subject any asset to such prohibition for indefinite period of time. To remove this difficulty, the Amending Act, 1987 has introduced a new sub-section (8A) in the section to provide that a prohibitory order will not be operative for a period exceeding 60 days from the date of the order unless the authorised officer records reasons in writing and obtains the approval of the Commissioner to such extension. It is further provided that the Commissioner shall not approve the extension of the period beyond the expiry of 30 days after the completion of all the proceedings under the Act in respect of the years for which the books of account, documents, money, bullion, jewellery or other valuable articles or things are relevant.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.7 Sub-section (4) empowers the authorised officer to examine on oath any person found to be in possession or control of any books of account, documents, valuable articles, etc., during the search. The Bombay High Court has held that the power to interrogate on oath conferred by the said sub-section (4) is not for the purposes of general investigation, but for the limited purpose of seeking examination of things found during the search. This restrictive interpretation rendered the examination on oath during the search operations practically ineffective. To get over this difficulty, the Amending Act, 1987 has inserted an Explanation in sub-section (4) to clarify that examination on oath mentioned therein need not be confined to the books of account, other documents or assets found during the search, but can also be for the purposes of investigation connected with any proceedings under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.8 Sub-section (5) provides that where any money, valuable articles, etc., have been seized, the Income-tax Officer has to pass a summary order within 120 days of the seizure, estimating the extent of the concealed income and calculating the amount of tax, penalty and interest thereon, and appropriate the seized assets against the liability so determined or against any other existing liability of the assessee.Explanation 1 at the end of the section provides that the period of stay or injunction order by a Court is to be excluded in computing the limit of 120 days mentioned in sub-section (5). The mention of �120 days� in Explanation 1 is not necessary and the purpose will be served by making a reference to the period referred to in sub-section (5). The Amending Act, 1987 has, therefore, made the necessary amendment to Explanation 1. The effect is that amendment of the Explanation will not be necessary if the period of 120 days mentioned in sub-section (5) is enhanced or reduced subsequently.

Note : For further amendments to section 132 by the Finance Act, 1988, refer paras 34.1 to 34.3 of the explanatory notes on the Finance Act, 1988 [Circular No. 528].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Consequential amendments to section 132A relating to powers to requisition books of account, etc.

9.9 The Amending Act, 1987 has made amendments of consequential nature in this section pursuant to the changes in designations of income-tax authorities.

Note : The Finance Act, 1988 has further clarified that these amendments would come into force with effect from 1-4-1988 [clause (c) of section 88 of the Finance Act, 1988].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to powers of income-tax authorities to call for information [section 133]

9.10 Under the old provisions of clause (4) of the section, the income-tax authorities mentioned in the section were empowered to call upon any assessee to furnish a statement of the names and addresses of all persons to whom he had paid in any previous year rent, interest, commission, royalty, brokerage or any annuity (except annuity, taxable under the head �Salaries�) together with particulars of the payment, if such payment exceeded Rs. 400. This monetary limit being very small, the Board, after consideration of various representations received in this regard, issued a circular on 15-6-1977 raising the limit to Rs. 1,000 although in the statute the amount mentioned continued to be Rs. 400 only. To remove this anomaly, the Amending Act, 1987 has amended the said clause (4) of the section to raise the limit to Rs. 1,000 and has further empowered the Board to raise the limit through rules, so that amendment of the Act will not be necessary, if at any time in future, the limit is to be raised further.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987

9.11 Under the old provisions of clause (6) of the section, the income-tax authorities mentioned in the section, namely, the Assessing Officer, the Deputy Commissioner (Appeals), the Deputy Commissioner and the Commissioner (Appeals) were empowered to require any person, including a bank or its officers to provide such information or statements of account and affairs as may be useful or relevant to any income-tax proceedings. This power would also be required by the Chief Commissioner or Commissioner for taking necessary action under various provisions of the Act, particularly when they have to decide a revision application under section 264. These powers would also be required by the Director-General or Director for proper investigation or intelligence work. The Amending Act, 1987 has, therefore, inserted a proviso at the end of the section to provide that the powers referred to in clause (6) of the section can also be exercised by the Director-General, Chief Commissioner, Director and the Commissioner.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the provisions relating to power of survey [section 133A]

9.12 Under the old provisions of clause (a) of the Explanation to the section, the income-tax authorities, who were empowered to conduct survey under the section and take various actions during the survey operations, included an Inspector of Income-tax for certain purposes, if so authorised by the Income-tax Officer. This meant that an Inspector of Income-tax could conduct survey only when so authorised by the Income-tax Officer and the Deputy Commissioner or Assistant Director could not authorise an Inspector to conduct a survey. To remove this lacuna, the Amending Act, 1987 has amended clause (a) of the Explanation to provide that instead of only the Income-tax Officer, any income-tax authority mentioned in the section can authorise the Inspector of Income-tax to conduct the survey.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to disclosure of information respecting assessees [section 138]

9.13 Under the old provisions of clause (a) of sub-section (1) of the section, dealing with disclosure of information in respect of income-tax assessees, it was provided that information about �any assessee in respect of any assessment made� could be disclosed to other Central Government agencies and to the authorities under the Foreign Exchange Regulation Act, 1947 by the Board or by any income-tax authority specified by the Board. This meant that the information could be passed on only in respect of the person who was an assessee with the Department and that too when the assessment relating to information to be furnished had been completed. This restricted the free and quick exchange of information with certain Central Government Departments and agencies to fight the tax evasion effectively, because many a time, valuable information collected on account of survey or search operations or in the course of other income-tax proceedings could not be passed on to the other Departments, if the persons concerned were not already assessed to tax and their assessments were not already completed. The Amending Act, 1987 has, therefore, amended clause (a) of sub-section (1) of the section by removing the condition that the information to be passed on to the other Government Departments must relate to an assessee and to a completed assessment. Instead, it is provided that any information received or obtained by an income-tax authority in the performance of his functions under the Act may be disclosed.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.14 Under the old provisions of clause (b) of sub-section (1) of the section, the Commissioner of Income-tax was empowered to disclose information in respect of any assessee to any person, on an application by such person in the prescribed form, if he was satisfied that it was in public interest to do so. However, the information could be disclosed only in respect of persons who were assessees and in respect of �any assessment made�. The power of the Commissioner was thus, restricted and the information could not be disclosed unless the assessment had been completed. The Amending Act, 1987 has also amended clause (b) of sub-section (1) of the section so as to empower the Commissioner to disclose information relating to any assessee, received or obtained by any income-tax authority in the performance of his functions under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

9.15 These amendments (except the amendments mentioned in para 9.2 which come into force with effect from 1-6-1988 and the amendments mentioned in paras 9.4 and 9.9, which come into force with effect from 1-4-1988) come into force with effect from 1st April, 1989.

[Sections 36 to 41 of the Amending Act, 1987].

Liability in special cases – Trusts, etc., where shares of beneficiaries unknown and oral Trusts

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 164 by the Amending Act, 1987 and reversal of the amendments by the Amending Act, 1989

10.1 Section 164 provides that in the case of trusts, etc., if the individual shares of persons on whose behalf or for whose benefit the income is receivable are indeterminate or unknown, tax shall be charged at the maximum marginal rate on the entire income. The section further lays down certain circumstances under which the tax may not be charged at the maximum marginal rate. The Amending Act, 1987 made the following amendments to this section:�

(i) Sub-sections (2) and (3) of the section, which dealt with taxation of charitable or religious trusts, were omitted, as these provisions were to be covered by the new section 80F inserted by the Amending Act, 1987, which contained a comprehensive scheme of tax treatment of such charitable and religious trusts.

(ii) Some consequential amendments were also carried out in sub-section (1).

(iii) Explanation 2 to the section which defined the term �maximum marginal rate� was omitted. This was consequent upon the shifting of this definition to section 2. The result is that the definition of the term �maximum marginal rate� will now be valid for the purposes of the entire Income-tax Act. The shifting of the definition of �maximum marginal rate� to section 2 becomes necessary as tax is now to be charged at the maximum marginal rate, not only under section 164, but under some other sections of the Income-tax Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

10.2 As already explained earlier, the Amending Act, 1989 has omitted the new section 80F. Consequently, the Amending Act, 1989 has also reversed the amendments to section 164 as detailed at Sl. Nos. (i) and (ii) in the preceding para.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

10.3 The net effect is that only the omission of Explanation 2 to section 164, containing the definition of the term �maximum marginal rate� and the shifting of this definition to section 2 survives.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of section 164A dealing with charge of tax in the case of oral trust

10.4 Consequent upon the shifting of the definition of the term �maximum marginal rate� from section 164 to section 2, the Amending Act, 1987 has omitted clause (i) of the Explanation to section 164A which also defines the term �maximum marginal rate�.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Clause (n) of section 3 and sections 64 and 65 of the Amending Act,1987]

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

Taxation of association of persons and body
of individuals

Direct Tax Laws (Amendment) Act, 1987-IV

Insertion of section 167B to tax certain association of persons and body of individuals at the maximum marginal rate

11.1 Under the provisions of the First Schedule to the annual Finance Acts an association of persons or body of individuals is normally taxed at the rates applicable to individuals. However, under the old provisions of section 167A of the Income-tax Act, if the shares of the members of an association of persons were indeterminate or unknown, the entire income of the association was taxed at the maximum marginal rate. Since the instrumentality of the association of persons and body of individuals had been widely used in the past for tax evasion, the Amending Act, 1987 introduced a new scheme for their taxation by inserting section 167B in the Income-tax Act, which provided that in the case of an association of persons or body of individuals, tax shall be charged at the maximum marginal rate in the following circumstances:�

(i) Where the shares of the association or body are indeterminate or unknown (this was the earlier position also).

(ii) Where the shares of the members of the association or body are determinate, but any one of whose members has income above the maximum amount not chargeable to tax in the case of an individual.

It was also provided that if any member of such association or body was taxable at a rate higher than the maximum marginal rate, then the entire income of the association or body would be taxed at such higher rate.

Note : It may be clarified that the Amending Act, 1987 substituted the old section 167A relating to taxation of certain association of persons at the maximum marginal rate by a new section 167A, which provided for taxation of firms at the maximum marginal rate. This new section 167A has, however, been omitted by the Amending Act, 1989, which has withdrawn the new scheme of taxation of firm and partners [refer item 14 of the Table given in para 2.3 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of a new section 167B by the Amending Act, 1989

11.2 A number of representations were received against the provisions of section 167B, as inserted by the Amending Act, 1987. It was pointed out that the provision to tax the entire income of an association of persons or body of individuals at a rate higher than the maximum marginal rate if any of its members was taxable at such a higher rate would cause hardship in many cases. Some other anomalies in the provisions were also pointed out. The Amending Act, 1989 has, therefore, omitted section 167B inserted by the Amending Act,1987 and has inserted a new section 167B in its place, which removes the hardships and anomalies of the earlier section. The provisions of the new section 167B are as under:�

(1) Sub-section (1) provides that where the individual shares of the members of an association of persons or body of individuals in the whole or any part of the income of such association or body are indeterminate or unknown, tax shall be charged on the total income of the association or body at the maximum marginal rate.

A proviso to the sub-section provides that where the total income of any member of such association or body is chargeable to tax at a rate higher than the maximum marginal rate, tax shall be charged at such higher rate on the total income of the association or body.

(2) Sub-section (2) provides that in the case of other association of persons and body of individuals (i.e., where the shares of the members are determinate),�

(i) if the total income of any member of such association or body (excluding his share from the association or body) exceeds the maximum amount which is not chargeable to tax in the case of that member; tax shall be charged on the total income of the association or body at the maximum marginal rate;

(ii) if any member or members of such association or body is or are chargeable to tax at a rate or rates which is or are higher than the maximum marginal rate, tax shall be charged at such higher rate or rates only on that portion or portions of the total income of the association or body which is or are relatable to the share or shares of such member or members and the balance of the total income of the association or body shall be taxed at the maximum marginal rate.

(3) An Explanation at the end of the section explains the circumstances in which the shares of the members of the association or body in the income of such association or body shall be deemed to be indeterminate or unknown.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

11.3 The effect of the provisions of the new section 167B is that only those association of persons and body of individuals will be taxed at the normal rates applicable to individuals, etc., where the shares of the members are determinate and none of the members has taxable income or none of the members is taxable at a rate higher than the maximum marginal rate. Thus, only small associations of persons or body of individuals formed by persons who themselves are not taxable will henceforth be taxed at the normal rates. Persons who are taxable in the high income brackets or are taxable at a rate higher than the maximum marginal rate shall no longer be tempted to form an association of persons or body of individuals for being taxed at lower rates.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments in the provisions of other sections connected with the taxation of association of persons, body of individuals and their members

11.4 The Amending Act, 1987 also amended the provisions of sections 40, 67 and 86 of the Income-tax Act to bring forward new provisions for taxation of firm and partners as well as new provisions for taxation of association of persons, body of individuals and their members in these sections. However, since the Amending Act, 1989 withdrew the new scheme of taxation of firm and partners, it also further amended these three sections to withdraw from them the new provisions relating to the taxation of firm and partners, but to retain the new provisions relating to taxation of association of persons, body of individuals and their members [refer items 5, 7 and 11 of the Table given in para 2.3 ante]. The combined effect of the amendments made by the Amending Act, 1987 and the Amending Act, 1989 in this respect is as follows :�

(i) A new clause (ba) has been inserted in section 40, which disallows deductions for any interest or salary, etc., paid by an association of persons or body of individuals to its members.

(ii) A new section 67A has been inserted, which deals with the method of computing a member�s share in the income of the association of persons or body of individuals.

(iii) A new clause (v) has been substituted in section 86, which deals with the manner of taxation of share of a member of an association of persons or body of individuals.

These new provisions of clause (ba) of section 40, section 67A and clause (v) of section 86 are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Provisions of new clause (ba) of section 40

11.5 The new clause (ba) provides that any payment of interest, salary, bonus, commission or remuneration by whatever name called, made by an association of persons or body of individuals to a member of such association or body shall not be allowed as a deduction while computing the total income of such association or body. These provisions are on the same lines as of clause (b), which disallows such payments made by a firm to its partners. Explanations 1 to 3 in the new clause (ba) deal with the treatment of interest paid by an association or body to its members or vice versa. TheseExplanations are also exactly on the same lines as Explanations 1 to 3 in clause (b), which deal with the treatment of interest paid by a firm to its partners and vice versa. It may be clarified that even before the insertion of this clause, such payments made by an association of persons or body of individuals to its members were not being allowed as a deduction in the hands of the association or body, as they were regarded as payments to self. This has now been given a statutory recognition.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Provisions of new section 67A

11.6 The new section 67A, which has sub-sections (1) to (3) and an Explanation, provides for the method of computing a member�s share in the income of an association of persons or body of individuals wherein the shares of the members are determinate, in the same manner as provided for in section 67 for computing a partner�s share in the income of the firm. However, the provisions of sub-section (4) of section 67, which deals with set off or carry forward of share of loss of a partner in a registered firm do not find place in section 67A, because there are no provisions in the Income-tax Act for the set off or carry forward of the share of loss of a member in an association or body in his own assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Old and the new provisions of clause (v) of section 86

11.7 Under the old provisions of clause (v) of section 86 read with section 110 although the share of a member of an association of persons or body of individuals received out of the income of such association or body on which income-tax had already been paid by the association or body, was included in the total income of the member, but a rebate of tax was given on such share at the average rate of tax applicable to the total income of the member including the said share. The share of a member in the income of an association of persons was so included in his total income even where the shares of the members in the association were indeterminate so that the association had been taxed at the maximum marginal rate. For this purpose, all the members of such association were deemed to be entitled to receive an equal share in the total income of the association.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

11.8 Consequent upon the insertion of a new section 167B in the Income-tax Act, which now levies tax at the maximum marginal rate on association of persons as well as body of individuals under various circumstances and even taxes them at a rate higher than the maximum marginal rate under certain circumstances, the old clause (v) of section 86 has also been substituted by a new clause (v). Under the provisions of the new clause (v) of section 86 read with section 110, the share of a member in the income of the association or body is treated in three different ways, depending upon whether the association or body is chargeable to tax at the maximum marginal rate or at the normal rate or is not chargeable to tax at all. These are :�

(i) Where the association or body is chargeable to tax at the maximum marginal rate or at a rate higher than the maximum marginal rate the share of a member therein shall not be included in his total income at all.

(ii) Where the association or body is chargeable to tax at the normal rates applicable to individuals, etc., the share of a member therein shall be included in his total income, but a rebate shall be given on the same, as was being done under the old provisions.

(iii) Where no income-tax is chargeable on the total income of the association or body, the share of a member therein shall be fully chargeable to tax as part of his total income and no rebate shall be given thereon. Thus, where an association of persons or body of individuals is taxable at the normal rates applicable to individuals, etc., but has income below taxable limit so that no income-tax is chargeable on the total income of the association or body, the share of a member in such association or body shall be fully taxable in his own assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Change of sub-heading �DD – Association of persons – Special cases� of Chapter XV

11.9 The total sub-heading �DD-Association of persons – Special cases� of Chapter XV had only one section 167A dealing with taxation of certain association of persons at the maximum marginal rate. Since the new section 167B inserted under this sub-heading now deals with taxation of certain association of persons as well as body of individuals at the maximum marginal rate, the sub-heading has also been changed to �DD- Association of persons and body of individuals�.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Clause (ii) of section 13, sections 17, 29 and 66 of the Amending Act, 1987]

[Sections 9, 12, 17, 26, 27, 28 and clauses (f), (g) and (i) of section 95 of the Amending Act,1989].

Collection and Recovery of Tax

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Streamlining the procedure for recovery to make it more effective

12.1 The Amending Act, 1987 has made a number of changes in sections 220 to 231 dealing with the procedure for collection and recovery of tax to make the provisions of these sections more effective for quicker recovery of tax. Thus, the Tax Recovery Officer (hereinafter referred to as TRO) will now be authorised by the Chief Commissioner or Commissioner of Income-tax to act as such and will work under the administrative control of the Commissioner of Income-tax. The TRO shall now have concurrent jurisdiction with the Assessing Officer and the requirement of issue of tax recovery certificate by the Assessing Officer to the TRO to enable the latter to assume jurisdiction over recovery in a particular case has been dispensed with. Certain other amendments have also been made in the aforesaid sections to streamline their provisions. These amendments are discussed in detail in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of the definition of �Tax Recovery Commissioner� [clause (43B) of section 2]

12.2 In some bigger charges there were separate wings of TROs working under the control and supervision of Tax Recovery Commissioner. In order to bring about better co-ordination between the Assessing Officers and the TROs, it was decided that the latter should work under the administrative control of the respective administrative Commissioners. Consequently, the posts of �Tax Recovery Commissioners� being no longer necessary, have been abolished. The Amending Act, 1987 has, therefore, omitted clause (43B) of section 2 containing the definition of �Tax Recovery Commissioner�.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the definition of TRO [clause (44) of section 2]

12.3 Under the old provisions of clause (44) of section 2, a TRO was defined to mean a Collector or an Additional Collector or any other officer authorised by the State Government, by notification in the Official Gazette, to exercise the powers of a TRO. It also meant any Gazetted Officer of the Central or State Government authorised by the Central Government, by notification in the Official Gazette to exercise the powers of the TRO. The inclusion of Collector or Additional Collector or other officers of the State Government within the definition of TRO was a legacy of the past when arrears of direct taxes were recovered by the officers of the State Governments as arrears of land revenue. However, the Department�s own machinery for recovery came into existence long back and gradually the entire work of recovery throughout the country was taken over by the departmental officers working as TROs. So it was no longer necessary for the State Government officers to be authorised to work as TROs. Further, the necessity for the issue of notification in the Official Gazette by the Board before the departmental officers could be authorised to work as TROs, caused avoidable delay and difficulties in this respect.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.4 To remove the above difficulties and anomalies, the Amending Act, 1987 has substituted the old clause (44) by a new clause, which defines a TRO to mean any Income-tax Officer authorised by the Chief Commissioner or Commissioner, by general or special order in writing, to exercise the power of the TRO. Thus, Collector, Additional Collector and other State Government officials have been excluded from the definition of TRO. Also, it is no longer necessary that the TRO must be authorised by the Board by notification. An Income-tax Officer can now be authorised by the Chief Commissioner or Commissioner by order in writing to work as a TRO.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.5 The Amending Act, 1989 has further provided that the changed definition of TRO will come into effect from 1-4-1988.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to time for payment of tax demand and charge of interest for delayed payments [section 220]

12.6 Under the old provisions of sub-section (1) of section 220, any amount specified as payable in a notice of demand under section 156 was to be paid within 35 days of the service of the demand notice on the assessee. This period of 35 days was rather odd. The Amending Act, 1987 has , therefore, amended the said sub-section (1) to provide that the specified amount shall be paid within 30 days instead of 35 days.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.7 Under the old provisions of sub-section (2) of section 220, if the amount specified in the notice of demand was not paid within the time allowed in sub-section (1), simple interest @ 15% per annum was payable by the assessee. A proviso to the said sub-section (2) provided that if the demand was reduced as a result of rectificatory, appellate or revisionary orders mentioned therein, interest would also be reduced accordingly. The Amending Act, 1987 has made the following amendments to the said sub-section (2):�

(i) The rate of interest has been increased from 15% per annum to 1.5% per month or part of a month. This brings the interest payable for default practically at par with the market rate of interest and thus, removes the temptation for not paying the Government dues. Further, the rate of interest chargeable is on the same pattern as in section 244A of the Act for payment of interest by the Department on refunds due to the assessee.

Note : The use of the expression �part of a month� in the sub-section means that even where the delay is for part of a month, say even 1 day, interest shall be charged at 1.5% [refer para 10.11 of Part II of these explanatory notes].

(ii) The scope of the proviso to sub-section (2) has also been increased by providing that interest shall also be reduced if the demand is reduced as a result of order of the Settlement Commission under section 245D(4).

(iii) A second proviso has been inserted in sub-section (2) to provide that where the duration of default includes both the period prior to 1-4-1989 and the period subsequent to this date, calculation of interest for the earlier period will be on the basis of the old provisions (i.e., @ 15% per annum) and the calculation of interest for the subsequent period shall be on the basis of the new provisions (i.e., @ 1.5% per month or part of a month).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions regarding issue of recovery certificate to the TRO [section 222]

12.8 Under the old provisions of section 222, the Income-tax Officer was required to forward to the TRO a certificate under his signature specifying the amount of arrears due from the assessee and only then the TRO assumed jurisdiction for recovering the said arrears of tax in that case. This unnecessarily delayed the commencement of recovery proceedings by the TRO, as recovery certificates were generally issued by the Income-tax Officer after a lapse of more than three years when the time limit for issue of such certificates, mentioned in section 231, was to expire. To enable the TRO to function more efficiently, the Amending Act, 1987 has made amendments in section 222 to dispense with the requirement of issue of recovery certificate by the Income-tax Officer. Under the amended provisions, where the assessee is in default, the TRO shall assume jurisdiction by drawing up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee. Such �statement� shall continue to be called as a �certificate�.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Substitution of the old sections 223 to 225 by the new sections 223 to 225

12.9 The old sections 223 to 225 related to the matters indicated below:�

(i) Section 223 specified the TRO or the TROs to whom the Assessing Officer could send the recovery certificate for recovery of tax arrears in a case. Where the assessee had property within the jurisdiction of more than one TRO, the recovery certificate issued to one TRO could also be forwarded by that TRO, if necessary, to the other TRO or TROs for recovery.

(ii) Section 224 provided that the assessee could not object to the validity of a certificate issued by an Assessing Officer, but the Assessing Officer could withdraw, cancel, or correct a clerical or arithmetical mistake in the certificate by sending an intimation to the TRO.

(iii) Section 225 provided for grant of time for payment of tax demand and consequent stay of recovery proceedings, notwithstanding that a recovery certificate had been issued by the Assessing Officer, and also provided for amendment or withdrawal of the recovery certificate by the Assessing Officers as a result of modification of the demand in appeal or other proceedings under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.10 Pursuant to the amendments in section 222 (discussed in para 12.8 ante) according to which the TRO shall now assume jurisdiction by drawing the recovery certificate himself, all the three old sections 223 to 225 have been substituted by new sections, which empower the TRO to take all these actions himself instead of the earlier position where such actions could be taken by the Assessing Officer and then intimation sent to the TRO. Thus, the new sections provide as follows :�

(i) Section 223 now specifies the TRO or the TROs by whom the recovery is to be effected.

(ii) Section 224 now provides that the assessee cannot dispute the validity of the certificate drawn by the TRO, but if necessary, the TRO may himself cancel the certificate or correct any clerical or arithmetical mistakes therein.

(iii) Section 225 now provides for grant of time for payment of a demand under a certificate by the TRO himself. Similarly, the TRO can himself cancel or amend a recovery certificate pursuant to the modification of demand in appeal or other proceedings under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.11 Thus, instead of waiting for the Assessing Officer to amend or cancel the recovery certificate as a result of any appeal or other proceedings under the Act, the TRO shall now take action himself in this respect. This will quicken the recovery work as well as save the assessee the botheration of going to more than one officer, i.e., the Assessing Officer as well as the TRO for settling his recovery matters. Also, the TRO can himself grant time for payment of demand covered by the recovery certificate drawn by him. This power of the TRO to grant time will, however, run concurrent with the power of the Assessing Officer to grant time for payment of demand under the provisions of sub-sections (3) and (6) of section 220.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to other modes of recovery [section 226]

12.12 Section 226 provides for various coercive modes that can be adopted for recovery of outstanding demand, like attachment of salary, attachment of monies due from other persons (including banks) or by distraint and sale of immovable property in the manner laid down in the Third Schedule. Under the old provisions of this section, these modes of recovery could be adopted by the Assessing Officer only. The Amending Act, 1987 has, however, amended this section to provide that all the modes of recovery mentioned in this section can now be resorted to�

(i) by the Assessing Officer, where no certificate of recovery has been drawn up by the TRO under section 222;

(ii) by the TRO, where a certificate of recovery has been drawn up by the TRO under section 222.

Thus, after the TRO draws up a certificate under section 222 in a case, he assumes exclusive jurisdiction to take action under the provisions of section 226 in that case.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of section 228 relating to recovery of Indian tax in Pakistan and Pakistan tax in India

12.13 The Amending Act, 1987 has omitted section 228 which provided for reciprocal arrangements for recovery of tax due in either country from the assets of an assessee in the other country.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Consequential amendments in section 228A relating to recovery of tax in pursuance of agreements with foreign countries

12.14 Section 228A provides for reciprocal arrangements for recovery of tax due in India and in a country with which there is an agreement for recovery of income-tax. The Amending Act, 1987 has made consequential amendments to section 228A pursuant to the amendments made to section 222 whereby the recovery certificate is now to be drawn by the TRO and not by the Assessing Officer.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to sections 222 to 226, 228 and 228A by the Amending Act,1989

12.15 The Amending Act, 1989 has further amended sections 222 to 226, 228 and 228A and the provisions of the Amending Act,1987, to secure that the words �Income-tax Officer� occurring in these sections, as they stood immediately before their amendment by the Amending Act, 1987, are substituted by the words �Assessing Officer� retrospectively with effect from 1-4-1988. This was to enable the Assessing Officers (including Assistant Commissioners and Deputy Commissioners) to issue recovery certificates on 31-3-1989 under the old provisions. However, in section 226, the amendments, which empower the TRO to take action under the section, after he has drawn up a certificate of recovery under section 222 (as discussed in para 12.12 ante) shall take effect from 1-4-1989 only.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to the issue of tax clearance certificate to persons leaving India [sub-section (1) of section 230]

12.16 Under the old provisions of sub-section (1) of section 230, no person, who was not domiciled in India or who, even if domiciled in India, had in the opinion of an income-tax authority, no intention of returning to India, could leave the territory of India without obtaining a tax clearance certificate from the competent authority authorised by the Government in this behalf. In the case of persons domiciled in India, there were no clear guidelines relating to the categories of persons who should be required to obtain the tax clearance certificates before leaving India. The number of persons of Indian domicile going abroad, either as bona fide tourists or on business trips, had increased tremendously and the vague provisions of section 230(1) became an obstacle in the case of such persons. It was felt that the provisions of section 230(1) should be made more specific in this regard.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.17 The Amending Act, 1987 has, therefore, amended sub-section (1) of section 230 to secure that a person, who is domiciled in India at the time of his departure, shall be required to obtain a tax clearance certificate only if,�

(i) he intends to leave India as an emigrant; or

(ii) he intends to proceed to another country on a work permit with the object of taking up any employment or occupation in that country; or

(iii) in respect of him circumstances exist which, in the opinion of an income-tax authority, render it necessary for him to obtain a tax clearance certificate.

Thus, the provisions of section 230(1) have now been made more specific so that persons of Indian domicile would now be required to obtain a tax clearance certificate under this section only when they are leaving the country as emigrants or on work permits or if they are specifically required by the income-tax authority to do so.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to restrictions on transfer of immovable property in certain cases [section 230A]

12.18 Under the old provisions of section 230A, a registering authority was prohibited from registering the transfer, assignment, etc., of any immovable property valued at more than Rs. 50,000 unless the person concerned, i.e., the transferor or mortgagor, etc., produced a tax clearance certificate from the Income tax Officer stating that such person had either paid or made satisfactory arrangements for the payment of the existing liabilities under the various Direct Taxes Acts mentioned therein. Since, keeping in view the substantial increase in the value of immovable properties, the limit of Rs. 50,000 was very low, the Amending Act, 1987 has enhanced this limit to Rs. 1,00,000.

Note : The Finance Act, 1988 further increased this limit to Rs. 2,00,000 and made the amended provisions effective from 1-4-1988 [section 41 and clause (d) of section 88 of the Finance Act, 1988].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of section 231 relating to the time limit for commencing recovery proceedings

12.19 Section 231 provided that no proceedings for the recovery of any sum payable under the Act shall normally be commenced after the expiry of three years from the last date of the financial year in which the demand was made. This meant that a recovery certificate could not be issued by the Assessing Officer after the expiry of the aforesaid period. Since, with the amendment of section 222, the requirement of the issue of a recovery certificate by the Assessing Officer has been dispensed with and the TRO can now draw the statement of arrears and assume jurisdiction as soon as the assessee is in default, the provisions of section 231 are no longer necessary. The Amending Act, 1987 has, therefore, omitted the same.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the provisions of the Second Schedule relating to procedure for recovery of tax by the TRO

12.20 The recovery of outstanding tax is done by the TRO according to the provisions of the Second Schedule to the Income-tax Act. The Amending Act, 1987 has made a number of changes in the Second Schedule, most of which are consequential to the amendments made in the provisions of sections 222 to 231 and also omission of sub-section (43B) ofsection 2 containing the definition of �Tax Recovery Commissioner� and amendments to sub-section (44) of section 2 containing the definition of the �Tax Recovery Officer�. Certain other changes in the provisions of the Second Schedule have also been made.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.21 The amendments made by the Amending Act, 1987 to the Second Schedule are briefly discussed as follows:�

(i) Consequent upon insertion of the new section 276 in the Income-tax Act providing for prosecution for certain defaults in connection with the provisions of the Second Schedule, which were hitherto provided in rule 89 of the said Schedule [refer para 17.1 of these explanatory notes], the following amendments have been made:�

(1) A reference to section 276 has been included in the heading of the Second Schedule.

(2) Rule 89 has been omitted.

(ii) Pursuant to the amendments made to sections 222 to 225, whereby the existing requirement of issue of a recovery certificate by the Income-tax Officer has been replaced by the powers of the TRO to himself draw the statement of arrears in a case for proceeding with the recovery of dues in that case and whereby the TRO will himself be able to exercise the functions which were hitherto performed by the Income-tax Officer, consequential amendments have been made to rules 1, 2, 8, 9, 14, 25, 27, 31, 47, 60, 73, 74, 77, 85 and 90.

(iii) Pursuant to the amendment of the definition of �Tax Recovery Officer� contained in sub-section (44) of section 2, whereby the Collector, Additional Collector and other State Government officials have been excluded from the definition of TRO, the old rule 19A relating to entrustment of certain functions by the TRO to officers of lower rank have been substituted by a new rule 19A, which contains amended provisions consequent to the aforesaid amended definition of TRO.

(iv) Under the provisions of sub-rule (1) of rule 59, where the sale of a property, for which a reserve price has been specified, has been postponed for want of a bid of an amount equal to or greater than the reserve price, the Income-tax Officer, if so authorised by the Commissioner in this behalf, can bid for the property on behalf of the Central Government at any subsequent sale. However, rule 57 requires the purchaser to deposit immediately after the declaration of sale to him, 25% of the amount of the purchase money with the officer conducting the sale and to pay the balance amount to the TRO within 15 days of the sale. This requirement of rule 57, apart from being unnecessary where the Department is the successful bidder, is an impediment to the bidding by the Income-tax Officer. To overcome this difficulty, a new sub-rule (3) has been inserted in rule 59 to provide that where the Income-tax Officer is declared a purchaser of a property at any subsequent sale, the provisions of rule 57 shall not apply to the case and the amount of the purchase price shall be adjusted towards the outstanding amount specified in the recovery certificate.

(v) Under the provisions of rule 61, the Income-tax Officer can also apply to the TRO for setting aside, under certain circumstances, the sale of immovable property in execution of a certificate, if his interests are affected by such sale. Amendments have been made to this rule to provide that such action under the rule can be taken by an Income-tax Officer only if he is authorised by the Chief Commissioner or Commissioner in this behalf.

(vi) Pursuant to the abolishing of the posts of �Tax Recovery Commissioners� and the TROs now working under the administrative control of the Chief Commissioner or Commissioner, consequential amendments have been made to rules 82, 83, 87 and 92.

(vii) Pursuant to the abolishing of the posts of �Tax Recovery Commissioners� and omission of sub-section (43B) of section 2 containing the definition �Tax Recovery Commissioner� and also pursuant to the amendments to sub-section (44) of section 2 containing the definition �Tax Recovery Officer� whereby the Collector, Additional Collector and other State Government officials have been excluded from the definition of TRO, consequential amendments have been carried out in rule 86 relating to appeals against the orders of the TRO.

(viii) A new rule 94 has been inserted in the Second Schedule to provide for continuance of all pending proceedings under this Schedule before coming into force of the amendments to the Schedule by the Amending Act, 1987 from the stage they had reached. The rule also provides that every recovery certificate issued by the Income-tax Officer under section 222 before such amendment, shall be deemed to be a certificate drawn up by the TRO under that section after such amendment. The rule further empowers the Board to issue general or special order for the purposes of removing any difficulty regarding the continuity of the pending recovery proceedings.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to the Second Schedule by the Amending Act, 1989

12.22 The Amending Act, 1989 has further amended the Second Schedule to the Income-tax Act and also the provisions of the Amending Act, 1987, to secure that the words �Income-tax Officer� occurring in the Second Schedule, as it stood immediately before its amendment by the Amending Act, 1987, are substituted by the words �Assessing Officer� retrospectively with effect from 1-4-1988. This was to enable the Assessing Officers (including Assistant Commissioners and Deputy Commissioners) to continue to take actions envisaged in the old provisions of the Second Schedule during the period 1-4-1988 to 31-3-1989. The Amending Act, 1989 has, however, further secured that other amendments to the Second Schedule made by the Amending Act, 1987 shall take effect from 1-4-1989 only.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to the Third Schedule by the Amending Act, 1987 and the Amending Act, 1989

12.23 The Third Schedule to the Income-tax Act lays down the procedure for distraint and sale of movable property where outstanding dues are to be recovered from the assessee by this method under the provisions of section 226(5) of the Income-tax Act. Since action under the old provisions of section 226(5) could be taken only by the Income-tax Officer, the old provisions of the Third Schedule referred to an Income-tax Officer only. However, since under the amended provisions of section 226(5), action envisaged in that section can now be taken by the Assessing Officer as well as by the TRO, the Amending Act, 1987 has amended the Third Schedule to substitute the reference therein to �Income-tax Officer� by a reference to the �Assessing Officer or Tax Recovery Officer�.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.24 The Amending Act, 1989 has further amended the said Third Schedule and also the provisions of the Amending Act, 1987 to secure that the words �Income-tax Officer� occurring in the Third Schedule, as it stood immediately before its amendment by the Amending Act, 1987, are substituted by the words �Assessing Officer� retrospectively with effect from 1-4-1988. This was to enable the Assessing Officers (including Assistant Commissioners and Deputy Commissioners) to continue to take action envisaged in the old provisions of the Third Schedule during the period 1-4-1988 to 31-3-1989. The Amending Act, 1989 has, however, further secured that with effect from 1-4-1989, the words �Assessing Officer� in the Third Schedule are substituted by the words �Assessing Officer or Tax Recovery Officer� so that the amendments made by the Amending Act, 1987 in this respect are restored.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

12.25 These amendments [except amendments to section 2(44) mentioned in para 12.4, certain amendments to sections 222 to 226, 228 and 228A mentioned in para 12.15 and certain amendments to the Second and Third Schedules mentioned in paras 12.22 and 12.24, which come into effect from 1-4-1988] come into force with effect from 1st April, 1989.

[Clauses (q) and (r) of section 3, sections 85 to 93, 124 and clause (28) of section 126 of the Amending Act, 1987].

[Sections 36, 37, 54, and 55 sub-clause (2) of clause (a) and clauses (l), (n) and (o) of section 95 of the Amending Act, 1989].

Refunds

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions relating to refund on appeal or any other proceeding under the Act [section 240]

13.1 Section 240 of the Income-tax Act provides that where refund of any amount becomes due to the assessee as a result of any order passed in appeal or other proceeding under the Act, the Assessing Officer shall refund the amount to the assessee suo motu, i.e., without the assessee having to make any claim in this behalf. Under the old provisions of this section, where an assessment was set aside or cancelled by the appellate or revisionary authority with the direction of making a fresh assessment, the assessee became entitled to obtain the refund of the amount of tax already paid over and above the tax on returned income. Therefore, if the assessee made a claim for refund in such circumstances, he could not be asked to wait till the fresh assessment order was passed. On the other hand, granting of such refund created difficulty, because, in many cases, with the passage of time it became very difficult to recover the additional demand created on fresh assessment. Further, where additional demand was created on fresh assessment, after refund of tax on setting aside of the original assessment had already been granted, the Department lost interest due to it on the amount of the additional demand created, for the intervening period (i.e., period between the issue of refund to the assessee and completion of fresh assessment). To remove this difficulty the Amending Act, 1987 has inserted a proviso in the said section 240 to provide that where the assessment is set aside or cancelled with the direction to make an order of fresh assessment, any refund shall become due only on the making of a fresh assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

13.2 Further, where the assessment had been annulled in appeal, say for want of jurisdiction or for any other technical reason, and such annulment became final, the judicial pronouncements did not permit retention of even the tax due on the basis of the returned income. Several High Courts had held that in such a case even the tax paid by way of tax deducted at source or advance tax and the tax which was due on the basis of the returned income had to be refunded to the assessee. Equity demanded that even where an assessment was annulled for any reason, the liability of the assessee, at least to the extent of tax payable on the basis of the income declared in the return, should remain. To overcome this difficulty and to make the position clear, the proviso to section 240, inserted by the Amending Act, 1987, provides that where the assessment is annulled, the refund shall become due only in respect of the amount, if any, paid in excess of the tax chargeable on the total income returned by the assessee.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Section 95 of the Amending Act, 1987]

Appeals

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Substitution of a new section 246 by the Amending Act, 1987 and further amendments therein by the Amending Act, 1989

14.1 Under the old provisions of section 246, various orders passed under the Income-tax Act were enumerated against which assessees could file appeal before the Appellate Assistant Commissioner or the Commissioner (Appeals). Since the Amending Act, 1987 inserted several new provisions under the Income-tax Act, including the new scheme of assessment of firm and partners, omitted certain old provisions and also changed the designations of various income-tax authorities, the said section 246 was required to be overhauled. The Amending Act, 1987 has, therefore, substituted a new section 246 in the Income-tax Act. The Amending Act, 1989 has further made amendments in the said new section 246 to set right certain anomalies and remove omissions and also to reverse the changes incorporated therein pursuant to the new scheme of assessment of firm and partners, as the said new scheme itself was withdrawn by the Amending Act, 1989. The provisions of the old section 246 and the new section 246, as it has emerged after amendments by the Amending Act, 1987 and the Amending Act, 1989, are discussed in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

14.2 The old sub-section (1) of the section consisted of clauses (b) to (o), which specified various orders of an Income-tax Officer against which the assessee could appeal to the Appellate Assistant Commissioner. The new sub-section (1) now consists of clauses (a) to (l) and specifies the orders of an Assessing Officer (other than a Deputy Commissioner) against which an assessee may appeal to the Deputy Commissioner (Appeals). The changes effected are:�

(i) Appeals against orders passed under the following sections/sub-sections of the Income-tax Act have been omitted consequent to the omission of the said sections/sub-sections from the Act:�

(1) An order imposing fine under section 131(2).

(2) An order under section 146 refusing to reopen an ex parte assessment under section 144.

(3) An order imposing a penalty under section 140A.

(4) An order imposing a penalty under section 270.

(ii) Appeals, which, under the old provisions, were allowed to be filed against orders of charge of interest under section 216 or against orders of penalties passed under sections 272, 272B and 273, are now allowed only in respect of orders passed under these sections for the assessment year 1988-89 or any earlier assessment years consequent upon the omission of these sections or the barring of the applicability of these sections after the assessment year 1988-89.

(iii) Appeals are now provided against orders levying penalties under sections 271B and 272A [for which there were earlier no appeals under sub-section (1)], order levying penalty under section 272AA (for which there was no appeal earlier) and orders levying penalties under sections 271C, 271D and 271E (which have been newly inserted by the Amending Act, 1987).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

14.3 The old sub-section (2) of the section consisted of clauses (a) to (d) and (f) to (i), which specified various orders against which an assessee could appeal to the Commissioner (Appeals). The new sub-section (2) also provides for appeals to the Commissioner (Appeals) but consists of clauses (a) to (h). The changes effected are:�

(i) Appeals against orders passed under the following sections/sub-sections of the Income-tax Act have been omitted consequent upon the omission of the said sections/sub-sections of the Act:�

(1) An order made by the Deputy Commissioner imposing fine under section 131(2).

(2) An assessment order made on the basis of the directions issued by the Deputy Commissioner under section 144B.

(3) An order imposing a penalty under section 271(1)(c) with the previous approval of the Deputy Commissioner under the proviso to section 271(1)(iii).

(ii) Appeal is now provided against an order made by the Deputy Commissioner levying penalty under section 272AA, for which there was no appeal earlier.

(iii) Appeal is now provided under this sub-section against an order imposing penalty under Chapter XXI by the Income-tax Officer or the Assistant Commissioner with the prior approval of the Deputy Commissioner under the provisions of sub-section (2) of section 274.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

14.4 The old sub-sections (3) and (4), which dealt with pending appeals before the Appellate Assistant Commissioner before the �appointed day� when the institution of Commissioner (Appeals) came into existence with effect from 10-7-1978, having become redundant, do not find place in the new section 246. However, the old sub-section (5), which empowered the Board to transfer any pending appeal from the Appellate Assistant Commissioner to the Commissioner (Appeals) under certain circumstances, has been retained as sub-section (3) of the new section 246 with the following changes:�

(1) Now the appeals can also be transferred by the Director General, Chief Commissioner or Commissioner, if so authorised by the Board.

(2) The appeals are to be transferred from the Deputy Commissioner (Appeals) to the Commissioner (Appeals) instead of from the Appellate Assistant Commissioner to the Commissioner (Appeals). This is consequential to the changes in designations.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment of the sub-heading �A� of Chapter XX relating to appeals and revisions

14.5 The old sub-heading �A� of Chapter XX read as under:�

�Appeals to the Appellate Assistant Commissioner and Commissioner (Appeals)�.

As a result of amendments made to the sub-heading, first by the Amending Act, 1987 and then by the Amending Act, 1989, the said sub-heading �A� now reads as under:�

�Appeals to the Deputy Commissioner (Appeals) and Commissioner (Appeals).�

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of new section 246A by the Amending Act, 1987, and its omission by the Amending Act, 1989

14.6 A new section 246A was inserted by the Amending Act, 1987 which provided for filing of applications by the assessees before the Deputy Commissioner (Appeals) or the Commissioner (Appeals), after submission of returns, for advance decision on any issue in certain cases even before the assessment had been completed. This was in consequence of the charge of additional income-tax under a new section 158B, which was also inserted by the Amending Act, 1987. Since, following representations in this regard, the new section 158B has been omitted by the Amending Act, 1989, section 246A has also been omitted by the said Amending Act, 1989.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Section 99 of the Amending Act, 1987]

[Sections 42 to 44 of the Amending Act, 1989]

Modes of taking or accepting certain Loans and Deposits and Repayment of certain Deposits

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions which require the taking or accepting of a loan or deposit by an account-payee cheque or account-payee bank draft [section 269SS]

15.1 Under the old provisions of section 269SS, no person could take or accept from any other person any loan or deposit otherwise than by an account-payee cheque or account-payee bank draft if the amount of such loan or deposit or the aggregate amount of such loans or deposits was Rs. 10,000 or more. The provisions of this section caused hardships in the cases of agriculturists while carrying out transactions among themselves. The provisions of section 269SS are meant to prevent tax evasion. However, where agriculturists do not have any other income except income from agriculture, which is not liable to income-tax, there is no purpose of applying the provisions of section 269SS to them. Further, the monetary limit of Rs. 10,000 which was fixed long back, was found to be causing hardship in the case of small genuine transactions.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

15.2 To remove the above hardships, the Amending Act, 1987 has amended section 269SS to make the following changes:�

(i) The monetary limit for the application of the provisions of the section has been increased from Rs. 10,000 to Rs. 20,000.

(ii) It has been provided that the provisions of this section shall not apply to any loan or deposit where both the persons involved in the transaction, i.e., the giver and the taker derive income only from agriculture and neither of them has any income chargeable to tax under the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments of the provisions which require the repayment of certain deposits by an account-payee cheque or account-payee bank draft [section 269T(2)]

15.3 Under the old provisions of sub-section (2) of section 269T, no company (including banks), co-operative society or firm could repay any deposit made with it otherwise than by an account-payee cheque or account-payee bank draft in the name of the person who had made the deposit, if the amount of the deposit or the aggregate amount of the deposits together with interest was Rs. 10,000 or more. A �deposit� was defined to mean any deposit of money which is repayable after notice or is repayable after a period. The provisions of section 269T were being circumvented in the following ways:�

(i) The provisions had limited applicability, as the same applied to banks, companies, co-operative societies and firms. This meant that individuals, HUFs, association of persons, etc., were not covered by these provisions.

(ii) The limited meaning given to the term �deposit� had been instrumental in the circumvention of the provisions by many, �Shroff bankers� and money-lenders, who maintained running accounts of the nature of current account and claimed non-applicability of the provisions of section 269T on the plea that the amount credited in such accounts of the customers were payable on demand and were not deposits. This problem did not arise in the case of companies, because they were prohibited by the Companies (Acceptance of Deposits) Rules, 1975, from accepting any deposits which are repayable on demand or on notice, except where such deposit is repayable after a minimum period of six months. All other entities like firms, individuals, association of persons, etc., could, however, help circumvent the provisions of this section.

Further, the monetary limit of Rs. 10,000 having been fixed long back, was causing hardship in the case of small genuine transactions.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

15.4 To remove the hardship pointed out above and also to prevent the circumvention of the provisions of the section, the Amending Act, 1987 has made the following amendments to sub-section (2) of section 269T :�

(i) The monetary limit for the application of the provisions of the said sub-section (2) has been increased from Rs. 10,000 to Rs. 20,000.

(ii) The scope of the sub-section is extended by inserting the words �or other person� after the word �firm�, so that the provisions of the sub-section are now applicable to all persons.

(iii) The definition of the term �deposit� has been amended. For the purposes of the section, the term �deposit� now means any deposit of money which is repayable after notice or repayable after a period and, in the case of a person other than a company includes deposit of any nature.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

15.5 These amendments come into force with effect from 1st April,1989, and will, accordingly, apply in relation to the transactions entered into after this date.

[Sections 103 and 104 of the Amending Act, 1987]

Penalties Imposable

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.1 The Amending Act, 1987 has made several amendments in the provisions relating to imposition of penalties contained in various sections of Chapter XXI of the Income-tax Act. The main features of the amendments are :�

(i) As far as possible, imposition of penalties and the quantum thereof has been delinked with the completion of assessment and the assessed tax, so that the penalties can be imposed immediately on the occurrence of the default without waiting for the finalisation of the assessment. This has also become necessary in view of the new procedure of assessment under which assessment orders will not be passed in a majority of cases.

(ii) Penalties leviable for default in filing the return of income or for default in complying with the provisions relating to payment of advance tax have been omitted consequent upon the charging of mandatory interest for these defaults under the provisions of the new sections 234A and 234B.

(iii) New penalty provisions have been introduced to provide for imposition of penalties for failure to deduct tax at source and for failure to comply with the provisions of sections 269SS and 269T.

(iv) As far as possible, provisions for imposition of penalties for defaults of miscellaneous nature, which were contained in different sections of the Act, have been consolidated at one place in a single section.

(v) The period of limitation for imposition of penalties has been substantially reduced.

The amendments made to various sections relating to imposition of penalties are discussed in detail in the following paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sections 270, 272 and 272B consequent upon the incorporation of the provisions thereof in a new section 272A

16.2 The Amending Act, 1987 has omitted the following sections of Chapter XXI of the Income-tax Act, consequent upon the incorporation of the provisions of these sections in the new section 272A :�

(i) Section 270 relating to penalty for failure to furnish information regarding securities, etc.

(ii) Section 272 relating to penalty for failure to give notice of discontinuance of business or profession.

(iii) Section 272B relating to penalty for failure to comply with the provisions of section 139A.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 271 by the Amending Act, 1987 and the Amending Act, 1989

16.3 Under the old provisions of section 271 of the Income-tax Act, penalties were leviable for defaults in furnishing return of income, failure to comply with notices issued under section 142(1) or 143(2) or a direction issued under section 142(2A) and for concealment of income. The Amending Act, 1987, however, substituted a new section 271 in the Income-tax Act, which levied penalties for failure to comply with notices or direction issued under section 142(1), 142(2A) or 143(2). Levy of penalty for default in furnishing the return of income was omitted, because it was replaced by the charge of mandatory interest under a new section 234A. Levy of penalty for concealment of income was omitted, as it was replaced by the charge of mandatory additional income-tax @ 30% of income under a new section 158B, which was also inserted by the Amending Act, 1987. However, following representations in this behalf, the Amending Act, 1989 has withdrawn the charge of mandatory additional income-tax by omitting the new section 158B inserted by the Amending Act, 1987 [refer item 3 of the Table given inpara 2.6 ante]. The Amending Act, 1989 has, therefore, amended the provisions of the Amending Act, 1987 and section 271 of the Income-tax Act to secure that the provisions regarding levy of penalty for concealment of income are again brought back in the said section 271. The combined effect of the amendments made by the Amending Act, 1987 and the Amending Act, 1989 in section 271 is that the following changes have been effected in the provisions of this section:�

(i) Provisions for levy of penalty for default in furnishing the return of income have been omitted, as these have been replaced by provisions for charge of mandatory interest under a new section 234A.

However, provisions for levy of penalty for default in furnishing the return of income under section 139 (4A) in the case of religious or charitable trusts have been incorporated in the new section 272A.

(ii) The new provisions for levy of penalty for failure to comply with notices/direction issued under sections 142(1), 142(2A) and 143(2) provide for a minimum penalty of Rs. 1,000 and maximum penalty of Rs. 25,000 for each default. Under the old provisions, penalty was computed with reference to the amount of tax which would have been avoided if the returned income had been accepted as the correct income.

(iii) The quantum of penalty for concealment of income or furnishing inaccurate particulars of income has been increased from �twice� to �three times� the tax sought to be evaded.

(iv) A new Explanation VI has been inserted in sub-section (1) of the section to provide that penalty for concealment of income shall not be imposed on that portion of income which is enhanced as a result of adjustments made under section 143(1) (a) and on which additional income-tax has been charged under section 143(1A).

(v) A new sub-section (5) has been inserted in the section to provide for a transitory provision, namely, that penalties for the assessment year 1988-89 and earlier assessment years shall be levied in accordance with the provisions of section 271, as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989).

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 271A relating to penalty for failure to keep, maintain or retain books of account, documents, etc.

16.4 Section 271A levies penalty for failure to keep, maintain or retain books of account or documents as required by section 44AA of the Income-tax Act or the rules made thereunder. Under the old provisions of the section, the penalty was computed with reference to the tax which would have been avoided if the returned income had been accepted as the correct income. The Amending Act, 1987 has amended the said section 271A to provide for a minimum penalty of Rs. 2,000 and a maximum penalty of Rs. 1,00,000, thus delinking the levy of penalty with the completion of assessment.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of a new section 271C to provide for levy of penalty for failure to deduct tax at source

16.5 Under the old provisions of Chapter XXI of the Income-tax Act no penalty was provided for failure to deduct tax at source. This default, however, attracted prosecution under the provisions of section 276B, which prescribed punishment for failure to deduct tax at source or after deducting, failure to pay the same to the Government. It was decided that the first part of the default, i.e., failure to deduct tax at source should be made liable to levy of penalty, while the second part of the default, i.e., failure to pay the tax deducted at source to the Government, which is a more serious offence, should continue to attract prosecution. The Amending Act, 1987 has accordingly inserted a new section 271C to provide for imposition of penalty on any person who fails to deduct tax at source as required under the provisions of Chapter XVIIB of the Act. The penalty is of a sum equal to the amount of tax which should have been deducted at source.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of new sections 271D and 271E to provide for levy of penalties for failure to comply with the provisions of sections 269SS and 269T

16.6 Under the old provisions of Chapter XXI of the Income-tax Act, no penalties were prescribed for failure to comply with the provisions of sections 269SS and 269T, which require the taking or accepting of certain loans or deposits or repayment of certain deposits by account-payee cheques or account-payee bank drafts if the amount of the deposits or loan is Rs. 20,000 or more. These defaults, however, attracted prosecution under the provisions of sections 276DD and 276E. It was decided that such defaults should, instead of attracting prosecution, be made liable to penalties. The Amending Act, 1987 has, therefore, omitted the said sections 276DD and 276E from the Income-tax Act and has inserted two new sections 271D and 271E to provide for penalties for these defaults. The amount of penalty is a sum equal to the amount of loan or deposit taken or deposit repaid in contravention of the provisions of section 269SS or 269T.

JUDICIAL ANALYSIS

EXPLAINED IN – In Muthoot M. George Bankers v. ACIT [1993] 46 ITD 10 (Cochin), it was observed as follows :

�From the above, it would be noticed that the monetary limit of Rs. 10,000 was raised to Rs. 20,000 under both the sections of 269SS and 269T and the Board had already clarified that the higher monetary limit will cover the transactions on and from 1-4-1989. Board�s Circular clarifying sections 271D and 271E deals with higher monetary limit of Rs. 20,000 which came into force with effect from 1-4-1989. Therefore, it is reasonable to hold that the penal provisions of section 271D and section 271E are intended to be operative prospectively from 1-4-1989 in respect of transactions done on or after 1-4-1989 exceeding the monetary ceiling of Rs. 20,000 offending the provisions of sec�tions 269SS and 269T. In other words, these two penal provisions are not intended to cover the transactions entered into prior to 31-3-1989 when the monetary ceiling prescribed under section 269SS or section 269T was only in a sum of Rs. 10,000.� (p. 18)

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Substitution of a new section 272A to provide for levy of penalties for miscellaneous defaults

16.7 Under the old provisions of section 272A of the Income-tax Act penalties were provided for various defaults of miscellaneous nature. Some penalties for defaults of miscellaneous nature were also provided for in certain other sections of the Act. The Amending Act, 1987 has substituted a new section 272A, which contains provisions for levy of penalties for defaults of miscellaneous nature, which were earlier mentioned in the old section 272A as well as various other sections of the Act, and which have now been consolidated in the said new section 272A.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.8 Various penalties leviable under the new section 272A fall under two categories. The first category is dealt with in various clauses of sub-section (1) of the section, where minimum and maximum penalties are provided for each default, while the second category, where the default is of continuing nature is dealt with in various clauses of sub-section (2) of the section where minimum and maximum penalties are provided for every day during which the default continues. A chart showing the nature of defaults and sub-sections and clauses of the new section 272A under which these defaults are covered is given below. The chart also shows the sub-sections and clauses of the old section 272A or other sections of the Act, under which the same defaults were covered earlier.

Sl. No.	Nature of default	Sub-section and clause of new section 272A	Sub-section and clause of old section 272A or other old sections of the Act which covered the default
1	2	3	4
1	Refusal by a person to answer certain questions put to him by any income-tax authority, when legally bound to state the truth of any matter concerning his assessment.	(1)(a)	(1)(a)
2.	Refusal to sign any statement made in the course of any proceedings under the Act.	(1)(b)	(1)(b)
3.	Non-compliance of summons issued under section 131(1) either to attend to give evidence or produce books of account or other documents at a certain place and time.	(1)(c)	Old section 131(2)
4.	Failure to comply with the provisions of section 139A relating to allotment of permanent account number.	(1)(d)	Old section 272B
5.	Failure to comply with a notice issued under section 94(6) requiring particulars of certain securities, etc., held by a person.	(2)(a)	Old section 270
6.	Failure to give notice of discontinuance of business or profession, as required under section 176(3).	(2)(b)	Old section 272
7.	Failure to furnish in due time any of the returns, statements or particulars mentioned in sections 133, 206, 206A, 206B, or 285B.	(2)(c)	(2)(a)
8.	Failure to allow inspection of any register referred to in section 134 or to allow copies thereof to be taken.	(2)(d)	(2)(b)
9.	Failure to furnish or furnish within time return of income under section 139(4A) in the case of religious or charitable trusts.	(2)(e)	Old section 271(1)(i)(a)
10.	Failure to deliver in due time to the Commissioner copy of declaration filed by the payee under section 197A.	(2)(f)	(2)(ba)
11.	Failure to furnish certificate of tax deducted at source, as required by section 203.	(2)(g)	(2)(c)
12.	Failure to deduct arrears of tax from salary and pay to the Central Govt. in accordance with the order of the Assessing Officer or the TRO under section 226(2).	(2)(h)	(2)(d)

*Note : Penalties for failure to furnish in due time the prescribed returns mentioned in sections 206A and 206B, which are to be filed by a person, who pays interest or dividends without deducting tax therefrom, were not leviable under the old provisions of section 272A or under any other sections of the I.T. Act. These have been newly included in the provisions of section 272A.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.9 The penalty leviable in respect of defaults covered by sub-section (1) of section 272A (mentioned at Sl. Nos. 1 to 4 in the above chart) is a minimum of
Rs. 500 extending up to the maximum of Rs. 10,000 for each default. The penalty leviable in respect of failures covered by sub-section (2) of section 272A (mentioned at Sl. Nos. 5 to 12 in the above chart) is a minimum of Rs. 100 extending up to the maximum of Rs. 200 for every day during which the failure continues.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.10 Sub-section (3) of the new section 272A specifies the authorities by whom the penalties under the section can be imposed. Penalty for failure covered by clause (f) of sub-section (2) [mentioned at Sl. No. 10 in the above chart] can be levied only by the Chief Commissioner or by the Commissioner. All other penalties under these sections are to be imposed by income-tax authorities not lower in rank than a Deputy Director or a Deputy Commissioner.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.11 Sub-section (4) of the new section 272A incorporates the old provisions requiring that, before imposing penalty under the section, the person concerned should be given an opportunity of being heard in the matter.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendment to section 273 to bar its applicability after the assessment year 1988-89

16.12 The penalties imposable under section 273 for defaults in complying with the provisions relating to payment of advance tax have been replaced by the charge of mandatory interest under a new section 234B inserted in the Income-tax Act by the Amending Act, 1987. The provisions of the new section 234B are applicable from the assessment year 1989-90 onwards. Consequently, the Amending Act, 1987 has inserted a new sub-section (3) in section 273 to provide that the provisions of this section would apply only up to the assessment year 1988-89.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 273A by the Amending Act, 1987 and the Amending Act, 1989

16.13 Under the old provisions of sub-section (1) of section 273A of the Income-tax Act, the Commissioner was empowered to reduce or waive the following penalties and interest:

(i) Penalty under section 271(1)(i) for failure to furnish the return of income under section 139(1).

(ii) Penalty under section 271(1)(iii) for concealment of income or furnishing inaccurate particulars of income.

(iii) Penalty under section 273 for not complying with the provisions relating to payment of advance tax.

(iv) Interest under section 139(8) for late filing or non-filing of return of income.

(v) Interest under sections 215 and 217 for filing wrong estimates or for not filing estimates for payment of advance tax.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.14 The provisions regarding levy of penalties and charge of interest for defaults in filing returns of income or in complying with the provisions regarding payment of advance tax have been omitted and replaced by charge of mandatory interest under the new sections 234A and 234B inserted by the Amending Act, 1987, which are applicable from the assessment year 1989-90. Consequently, the provisions of section 273A have also been amended by the Amending Act, 1987 and again by the Amending Act, 1989. The combined effect of the amendments made to section 273A by the two Amending Acts is indicated below:�

(i) Under the amended sub-section (1) of section 273A, only the penalty leviable under section 271(1)(iii) for concealment of income or furnishing inaccurate particulars of income [mentioned at Sl. No. (ii) in the preceding para] can be reduced or waived. The amended sub-section (1) does not now cover the penalty and interest mentioned at serial Nos. (i) and (iii) to (v) mentioned in the preceding para, as these are not leviable under the new provisions.

(ii) A new sub-section (6) has been inserted in the section to provide that the provisions of the section, as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989), shall apply up to assessment year 1988-89. This means that the amended provisions of section 273A would be applicable from the assessment year 1989-90 onwards.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 273B by the Amending Act, 1987 and the Amending Act, 1989

16.15 Section 273B provides that penalties imposable under certain sections of the Income-tax Act mentioned therein shall not be imposed if the person or the assessee concerned proves that there was reasonable cause for the default in question. Amendments have been made to this section by the Amending Act, 1987 as well as the Amending Act, 1989, which are consequential to the omission, substitution or insertion of certain sections in Chapter XXI dealing with penalties, as discussed in the preceding paras.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to the provisions of section 274 relating to procedure for levy of penalties

16.16 Under the old provisions of section 274 of the Income-tax Act, which lays down the procedure for levy of penalties, approval of any higher authority was not necessary for this purpose. The Amending Act, 1987 has amended the provisions of this section by inserting sub-section (2), which provides that the prior approval of the Deputy Commissioner should be obtained, if�

(i) the penalty is to be imposed by the Income-tax Officer and it exceeds Rs. 10,000;

(ii) the penalty is to be imposed by the Assistant Commissioner and it exceeds Rs. 20,000.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.17 Under the old provisions of sub-section (3) of section 274, it was provided that where the penalty was imposed by the Appellate Assistant Commissioner or the Commissioner (Appeals), they should forthwith send a copy of the penalty order to the ITO. In order to rationalise these provisions and also to make changes consequential to the new designation of income-tax authorities, the Amending Act, 1987 has substituted a new sub-section (3) in the section, which provides that where the penalty is imposed by an income-tax authority, which is not himself the Assessing Officer, he shall forthwith send a copy of the penalty order to the Assessing Officer.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Amendments to section 275 by the Amending Act, 1987 and the Amending Act, 1989

16.18 Under the old provisions of section 275 of the Income-tax Act, an order imposing a penalty under Chapter XXI of the Act could be passed within two years from the end of the financial year in which the proceedings, in the course of which action for imposition of penalty had been initiated, were completed. Where, however, the relevant assessment or other order was the subject-matter of appeal by the assessee to the Deputy Commissioner (Appeals) or Commissioner (Appeals) or was the subject-matter of appeal by the Department to the Appellate Tribunal, the penalty order could be passed within the aforesaid period of two years or within six months from the end of the month in which the order of the appellate authority was received by the Commissioner, whichever period expired later. Thus under the old provisions, penalty proceedings were completed long after the completion of assessment proceedings during which penalty proceedings had been initiated. It was felt that levy of penalty can have the requisite deterrent effect only when the penalty proceedings are disposed of expeditiously. Further, although under the old provisions the limitation was extended where the assessment order, etc., were the subject-matter of appeals, it was not extended where the assessment order was the subject-matter of revision by the Chief Commissioner or Commissioner under section 263. This was a lacuna in the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.19 In order to achieve quicker disposal of penalty proceedings and also to remove the lacuna pointed out above, the Amending Act, 1987 has amended section 275 to provide for substantially reduced limitation period for disposal of penalty proceedings. Under the amended provisions of section 275, no order imposing a penalty can be passed�

(i) in a case where the relevant assessment order or other order is the subject-matter of appeal by the assessee to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) or by the Department to the Appellate Tribunal, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed or six months from the end of the month in which the order of the appellate authority is received by the Chief Commissioner or Commissioner, whichever period expires later;

(ii) in a case where the relevant assessment order or other order is the subject-matter of revision under section 263, after the expiry of six months from the end of the month in which such order of revision is passed;

(iii) in any other case, after the expiry of the financial year in which the proceedings, in the course of which action for the imposition of penalty has been initiated, are completed or six months from the end of the month in which action for imposition of penalty is initiated, whichever period expires later.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.20 The Amending Act, 1989 has further amended clause (a) of section 275, which was substituted by the Amending Act, 1987, to set right a drafting error therein.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

16.21 These amendments come into force with effect from 1st April, 1989. However, in respect of amendment of section 275, which has reduced the limitation period for imposition of penalties [refer para 16.19 ante], it was clarified by the issue of an Income-tax (Removal of Difficulties) Order, 1989, videNo. GSR 376(E) dated 23-3-1989 [refer paras 11.2 and 11.3 of Part I of these explanatory notes] that the provisions of section 275, as they stood before the commencement of the Amending Act, 1987, shall apply in respect of any action for imposition of penalty initiated on or before the 31st day of March, 1989. It follows, therefore, that the reduced limitation period for imposition of penalties under the amended provisions of section 275 would apply to penalty proceedings initiated from 1st April, 1989 onwards.

Note : This clarificatory amendment has subsequently been incorporated in section 275 itself by the Direct Tax Laws (Second Amendment) Act, 1989, which received the assent of the President on 20-10-1989 as Act No. 36 of 1989.

[Sections 105 to 116 of the Amending Act, 1987]

[Sections 50 to 52, clause (4) of section 57 and clause (m) of section 95 of the Amending Act, 1989]

Offences and prosecutions

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of new section 276 to provide punishment for certain fraudulent actions to thwart tax recovery

17.1 The Amending Act, 1987 has inserted a new section 276 in the Income-tax Act, which provides punishment for fraudulent removal, concealment, transfer or delivery of property or any interest therein, intending thereby to prevent the property or interest therein from being taken in execution of a certificate under the provisions of the Second Schedule relating to procedure for recovery of tax. The punishment provided is rigorous imprisonment for a term which may extend to two years and also fine. The provisions of this section are in substitution for the provisions of rule 89 of the Second Schedule, which has been omitted by the Amending Act, 1987 [refer para 12.21 ante.]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Substitution of a new section for section 276B to exclude failure to deduct tax at source from prosecution provisions and to provide prosecution only for failure to pay tax deducted at source to the Government

17.2 Under the old provisions of section 276B, the following defaults were liable to prosecution:

(i) failure to deduct tax at source under the provisions of Chapter XVIIB.

(ii) failure to pay to the Government the tax so deducted at source.

The punishment provided was:�

(i) Where the amount involved exceeded Rs. 1 lakh, rigorous imprisonment ranging from a minimum period of six months to the maximum period of 7 years and fine.

(ii) Where the amount involved did not exceed Rs. 1 lakh, rigorous imprisonment ranging from a minimum period of three months to the maximum period of three years and fine.

Failure to deduct tax or to pay the tax so deducted under the provisions of section 80E(9) was also liable to the same punishments as indicated above.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

17.3 It was decided that the default indicated at serial No. (i) above, i.e., failure to deduct tax at source should only attract levy of penalty, while the default indicated at serial No. (ii) above, i.e., failure to pay the tax deducted at source to the Government should continue to attract prosecution. Further, since section 80E has been omitted by the Amending Act, 1987, reference to the said section in section 276B is no longer necessary. Further, it was also decided that the extent of punishment should not depend upon the amount of tax involved, but should be within a uniform range, leaving the discretion to the Court to award punishment according to the gravity of the offence.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

17.4 To achieve the above objectives the Amending Act, 1987 has substituted a new section 276B in the Income-tax Act to provide prosecution only for failure to pay to the Government the tax deducted at source by a person under the provisions of Chapter XVIIB. A uniform punishment has been provided for the offence, which is rigorous imprisonment for at least three months, extending up to 7 years and fine.

Note : Failure to deduct tax at source now attracts penalty under a new section 271C [refer para 16.5ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Omission of sections 276DD and 276E

17.5 The Amending Act, 1987 has omitted sections 276DD and 276E, which provided prosecution for contravention of the provisions of sections 269SS and 269T, as these defaults would now attract penalties under the newly inserted sections 271D and 271E [refer para 16.6 ante].

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Consequential amendment to section 278AA

17.6 Section 278AA provides that where a person proves that there was a reasonable cause for the failure, the punishment for defaults covered under the sections mentioned in the said section 278AA need not be imposed. Consequent upon the omission of sections 276DD and 276E, the Amending Act, 1987 has omitted references to these sections from the said section 278AA.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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

[Sections 117 to 120 of the Amending Act, 1987]

Miscellaneous provisions

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

Insertion of a new section 293B to empower the Central Government or Board to condone delays in obtaining approval

18.1 Under the provisions of section 119(2)(b) of the Income-tax Act, the Board is empowered to authorise any income-tax authority [except a Deputy Commissioner (Appeals) or a Commissioner (Appeals) to admit belated application or claim for any exemption, deduction, refund or any other relief under the Act and deal with them on merits in accordance with law. However, the Board had no such power to waive the time-limit where application had to be made to itself within a specified time. There are several provisions in the Act under which the Central Government or the Board is required to give its approval to agreements, contracts of service, etc., for the purposes of certain tax benefits, if the applications for such approvals are made within the specified time. It was felt that the Central Government and the Board should also have powers, on the analogy of the provisions of section 119(2)(b), to condone the delay in making an application to them for approval under various provisions of the Act. The Amending Act, 1987 has, therefore, inserted a new section 293B in the Income-tax Act, which empowers the Central Government or the Board to condone, for sufficient cause, any delay in obtaining the approval of the Central Government or the Board, where such approval is required to be obtained before a specified date under any provisions of the Act.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

18.2 This amendment comes into force with effect from 1st April, 1989.

[Section 121 of the Amending Act, 1987]

CONSEQUENTIAL AMENDMENTS

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

19.1 The Amending Act, 1987 has also carried out certain amendments of consequential nature in various sections of the Income-tax Act. Section 126 of the Amending Act, 1987, which has carried out the said consequential amendments, originally contained clauses (1) to (28). Out of these, clauses (5), (8), (11), (13), (23) and (28) have been omitted by the Amending Act, 1989. Thus only 22 effective clauses are left in the said section 126 of the Amending Act, 1987.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

19.2 Clauses (1) and (25) of the said section 126 of the Amending Act, 1987 have carried out consequential amendments to sections 2 and 279 respectively of the Income-tax Act. These amendments have come into force with effect from 1st April, 1988 and have already been referred to in Part I of these explanatory notes.

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

19.3 The other clauses of the said section 126 of the Amending Act, 1987 have carried out consequential amendments to various other sections of the Income-tax Act. These amendments have come into force with effect from 1st April, 1989. The clauses of section 126 of the Amending Act, 1987, which have carried out the consequential amendments and sections of the Income-tax Act, which have been so amended, are indicated in the following chart :-

Sl. No.	Clause of section 126 of the Amending Act, 1987, which has carried out consequential amendment	Section of the I.T. Act, which has been amended
1	2	3
1.	(2)	10 (15) (iiia)
2.	(3)	10A
3.	(4)	29
4.	(6)	40A(2)(a)
5.	(7)	41
6.	(9)	44
7.	(10)	80
8.	(12)	80HHA
9.	(14)	132B(1)(iii)
10.	(15)	133A(6)
11.	(16)	139(8)(b)
12.	(17)	144A
13.	(18)	174(4) & (6)
14.	(19)	176(5) & (7)
15.	(20)	199
16.	(21)	219
17.	(22)	234 (Omitted)
18.	(24)	276CC
19.	(26)	288(4) (b)
20.	(27)	First Schedule : Rule 5(a)

AMENDMENTS TO THE WEALTH-TAX ACT

Direct Tax Laws (Amendment) Act, 1987-IV

The Amending Act, 1987 has made amendments to the provisions of the Wealth-tax Act relating to powers of income-tax authorities, assessment of association of persons, collection and recovery of tax, refunds, appeals, penalties and offences and prosecutions, in order to bring these provisions in line with the corresponding provisions of the Income-tax Act, as they have emerged after their amendments by the said Amending Act, 1987 and which have been discussed in the preceding paras in this part of the explanatory notes. Any gaps or shortcomings in this respect have been removed through certain amendments made by the Amending Act, 1989. The Table below shows the provisions of the Wealth-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987 and the Amending Act, 1989, which have carried out the necessary amendments and the subject-matter of the amendments in brief:

Sl. No.	Section of the Amending Act, 1987/Amending Act, 1989	Section of the Wealth-tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
1	2	3	4	5
1.	128(iv) of the Amending Act, 1987.	2(h) (New clause inserted)	2(17)	Amendment of the definition of �company� in the Wealth-tax Act to bring it in line with its definition in the Income-tax Act.
2.	128(v) of the Amending Act, 1987.	2(lc) (New clause inserted)	2(29c)	Insertion of definition of �maximum marginal rate� in section 2 of the W.T. Act for the purposes of the Act, on the same lines as in the Income-tax Act.
*3.	(i) 142 of the Amending Act, 1987. (ii) 68, 69 & 95 (p) of the Amending Act, 1989	18 & 18A	271, 272A(1)(a) to (c) & 272A(2) (c), 274 & 275	Amendments of penalty provisions in the Wealth-tax Act to bring them in line with the corresponding provisions in the Income-tax Act.
4.	145 of the Amending Act, 1987.	21AA(1)	167B(1)	Amendments to section 21AA(1) relating to assessment when assets are held by association of persons where the individual shares of the members are indeterminate or unknown.
5.	(i) 146 of the Amending Act, 1987. (ii) 71 of the Amending Act, 1989.	23	246	Amendments to section 23 relating to appeals to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) from orders of the Assessing Officer
6.	148 of the Amending Act, 1987.	31	220	Amendments to section 31 relating to time for payment of tax, demand and charge of interest for delayed payments.
7.	149(b) of the Amending Act, 1987.	32	221-232, Second and Third Schedules	Amendments to section 32 relating to mode of recovery consequent upon the abolition of the post of �Tax Recovery Commissioner�.
8.	(i) 150(i) of the Amending Act, 1987. (ii) 73(a) of the Amending Act, 1989.	34A(1)	240	Amendments to section 34A(1) relating to refund on appeals, etc
9.	152 of the Amending Act, 1987.	35K	279(1A) & (3)	Amendments to section 35K relating to bar on prosecution and in- admissibility of evidence under certain circumstances.
*10.	153 of the Amending Act, 1987.	37	131	Amendments to section 37 relating to power to take evidence on oath, etc.
*11.	154 of the Amending Act, 1987.	37A	132	Amendments to section 37A relating to power of search and seizure.
12.	155 of the Amending Act, 1987.	37B	132A	Amendments to section 37B relating to powers to requisition books of account, etc.
13.	156 of the Amending Act, 1987.	37C (New section inserted)	132B	A new section 37C relating to application of retained assets inserted in the Wealth-tax Act containing provisions similar to those of section 132B of the Income-tax Act. Earlier, there was no such provision in the Wealth-tax Act.
14.	157 of the Amending Act, 1987.	38		Amendments to section 38 relating to power of wealth-tax authorities to call for information, returns and statements.

Notes: (i) Sections 143 and 147 of the Amending Act, 1987 had introduced new sections 18D and 23A in the Wealth-tax Act to provide for charging of additional wealth-tax @ 3% of wealth and for moving an application by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for deciding an issue before completion of assessment. These new sections have, however, been omitted by the Amending Act, 1989. This has also been discussed in para 2.6 ante and items at Sl. Nos. 6 and 7 in the Table given in that para.

(ii) Section 144 of the Amending Act, 1987 had made amendments to section 21A of the Wealth-tax Act relating to assessment of trusts, which were consequential to the introduction of the new scheme of assessment of charitable trust, etc., introduced in the Income-tax Act. However, consequent to the withdrawal of the said new scheme, the Amending Act, 1989 has also reversed the amendments made to section 21A of the Wealth-tax Act, thus restoring it back to its original form.

(iii) The amendments indicated at Sl. Nos. 3, 10 and 11 of the above Table, which are star-marked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987

Amendments to sections 18 and 18A, relating to penalties under the Wealth-tax Act, by the Amending Act, 1987 and the Amending Act, 1989

The Amending Act, 1987 had substituted the old sections 18 and 18A of the Wealth-tax Act by new sections. However, the Amending Act, 1989 has restored back the old section 18, but has made certain amendments in that section. Further, the Amending Act, 1989 has retained the new section 18A, as it was introduced by the Amending Act, 1987. The combined effect of the amendments made by the two Amending Acts to these sections is that the penalty provisions under the Wealth-tax Act have been brought, as far as possible, on the same lines as the corresponding provisions in the Income-tax Act. The changes made in sections 18 and 18A are as follows:�

(i) Changes made in section 18 (corresponding to sections 271, 274 and 275 of the Income-tax Act) – (1) Provisions for levy of penalty for default in furnishing return of wealth have been omitted.

(2) The new provisions for levy of penalties for failure to comply with notices under sections 16(2) and 16(4) provide for a minimum penalty of Rs. 1,000 and a maximum penalty of Rs. 25,000 for each default. Under the old provisions, penalty was computed with reference to the amount of wealth-tax which would have been avoided if the returned net wealth would have been accepted as the correct net wealth.

(3) Provisions for levy of penalty for concealment of wealth remain the same.

(4) A new Explanation 6 has been inserted in sub-section (1) to provide that penalty for concealment of wealth should not be imposed on that portion of wealth which is enhanced as a result of adjustments made under section 16(1)(a) and on which additional wealth-tax has already been charged under section 16(1A).

(5) Under a new sub-section (3) substituted in the section, prior approval of the Deputy Commissioner would be necessary, if�

(i) the penalty is to be imposed by the Income-tax Officer and it exceeds Rs. 10,000;

(ii) the penalty is to be imposed, by the Assistant Commissioner and it exceeds Rs. 20,000.

Under the old provisions, approval of the Deputy Commissioner was necessary for imposing penalty for concealment of wealth if the amount of concealed wealth exceeded Rs. 25,000.

(6) Under the old provisions of sub-section (5) of the section, time limit for imposition of penalties under the section was provided, which was on the same lines as under the old provisions of section 275 of the Income-tax Act i.e., it was generally more than two years (refer para 16.18 ante). A new sub-section (5) has been substituted in the section to provide for reduced time limits for imposition of penalties under this section, which are exactly on the same lines as the amended provisions of section 275 of the Income-tax Act (refer para 16.19 ante).

(7) A new sub-section (6) has been inserted in the section to provide for a transitory provision, namely that the penalties for the assessment year 1988-89 and earlier assessment years shall be levied in accordance with the provisions of section 18 as they stood immediately before their amendment by the Amending Act, 1989 (i.e., as they stood prior to 1-4-1989). Thus the amended provisions of section 18 would apply from the assessment year 1989-90 onwards.

The effect is that the old limitation provisions contained in sub-section (5) of the section would apply up to the assessment year 1988-89, while the new limitation provisions, contained in the newly substituted sub-section (5) of the section, would apply from the assessment year 1989-90 onwards. To this extent the provisions of section 18 of the Wealth-tax Act are different from the corresponding provisions in the amended section 275 of the Income-tax Act, where the application of the old or the new limitation provisions has been made dependent upon whether the penalty has been initiated on or before 31-3-1989 or after this date (refer para 16.21 ante).

(ii) Changes made in section 18A (corresponding to some of the penalties provided in section 272A of the Income-tax Act) – (1) Penalty for non-compliance of a summon issued under section 37(1) either to attend to give evidence or produce books of account or other documents at a certain place and time has been included in a new clause (c) of sub-section (1) of the section. Earlier, penalty for this default was provided in section 37(2).

(2) Penalty leviable for defaults covered by sub-section (1) of the section is a minimum of Rs. 500 and a maximum of Rs. 10,000 for each default. Under the old provisions the penalty leviable could extend up to Rs. 1,000 only and no minimum penalty was provided.

(3) Penalty leviable for default covered by sub-section (2) of the section is a minimum of Rs. 100 and a maximum of Rs. 200 for every day during which the default continues. Under the old provisions of sub-section (2), the penalty leviable could extend to Rs. 10 only for every day of default and no minimum penalty was provided.

(4) It has been provided that a penalty under this section can be imposed by the Deputy Director or the Deputy Commissioner. However, where the failure or default occurs in the course of any proceedings before a wealth-tax authority, not lower in rank than a Deputy Director or a Deputy Commissioner, the penalty can be imposed by such wealth-tax authority.

Note: Unlike section 18, there are no limitation provisions in section 18A. Therefore, penalties leviable under section 18A do not get time-barred.

[Section 142 of the Amending Act, 1987]

[Sections 68, 69 and 95(p) of the Amending Act, 1989]

Direct Tax Laws (Amendment) Act, 1987-IV

Amendments to section 37, relating to power to take evidence on oath, etc., by the Amending Act, 1987 and by the Finance Act, 1988

Section 37 of the Wealth-tax Act contains provisions corresponding to the provisions of section 131 of the Income-tax Act. Amendments made to section 131 of the Income-tax Act by the Amending Act, 1987 and by the Finance Act, 1988 have already been discussed in paras 9.1 to 9.3 ante. The Amending Act, 1987 and the Finance Act, 1988 have also amended section 37 of the Wealth-tax Act to bring its provisions on the same lines as the provisions of the amended section 131 of the Income-tax Act.

[Section 153 of the Amending Act, 1987]

[Sections 64 and 88(f) of the Finance Act, 1988]

Direct Tax Laws (Amendment) Act, 1987-IV

Amendments to section 37A, relating to power of search and seizure, by the Amending Act, 1987 and by the Finance Act, 1988

Section 37A of the Wealth-tax Act contains provisions corresponding to the provisions of section 132 of the Income-tax Act relating to power of search and seizure. However, under the old provisions of section 37A of the Wealth-tax Act, there were no provisions corresponding to sub-sections (5) to (7), (11) and (12) of section 132 of the Income-tax Act, relating to the passing of a summary order in respect of the seized assets for retaining the same in pursuance of such order and for filing and disposal of appeals against such orders. The Amending Act, 1987 has made substantial amendments to section 37A of the Wealth-tax Act, to include these provisions also in that section. The Amending Act, 1987 and the Finance Act, 1988 have also made other amendments to section 37A of the Wealth-tax Act which are on the same lines as the amendments made to section 132 of the Income-tax Act (refer paras 9.4 to 9.8 ante). The effect is that the provisions of the amended section 37A of the Wealth-tax Act are now exactly on the same lines as the provisions of the amended section 132 of the Income-tax Act.

[Section 154 of the Amending Act, 1987]

[Section 95(g) of the Finance Act, 1988]

Amendments to the Gift-tax Act

Direct Tax Laws (Amendment) Act, 1987-IV

The Amending Act, 1987 has made amendments to the provisions of the Gift-tax Act relating to powers of gift-tax authorities, collection and recovery of tax, refunds, appeals, penalties and non-application of the Act in certain cases, in order to bring these provisions in line with the corresponding provisions of the Income-tax and the Wealth-tax Acts, as they have emerged after their amendment by the said Amending Act, 1987 and which have been discussed in the preceding paras in this part of the explanatory notes. Any gap or shortcomings in this respect have been removed through certain amendments made by the Amending Act, 1989. The Table below shows the provisions of the Gift-tax Act that have been so amended and the corresponding provisions, if any, in the Income-tax Act. The Table also indicates the sections of the Amending Act, 1987 and the Amending Act, 1989 which have carried out the necessary amendments and the subject-matter of the amendments in brief.

Sl No.	Section of the Amending Act, 1987/ Amending Act, 1989	Section of the Gift-tax Act that has been amended	Corresponding section of the Income-tax Act	Subject-matter of the amendment in brief
(1)	(2)	(3)	(4)	(5)
1.	162 (c) of the Amending Act, 1987	2 (xvii) (omitted)		Definition of �partner� omitted consequent upon its inclusion in a new clause (xi) substituted in the section (refer Sl. No. 3 below).
2.	162 (d) of the amending Act, 1987	2(vii) new clause substituted)		Substitution of the definition of �company�, by the definitions of �company� �Indian company� and company in which the public are �substantially interested�, which have the same meaning as in section 2 of the income-tax Act.
3.	162 (e) of the Amending Act, 1987	2(xi) new clause substituted)		Substitution of the definition of �partner� by the definitions of �firm�, �partner� and �partnership� which have the same meaning as in section 2 of the Income-tax Act.
4.	(i) 174 of the Amending Act, 1987, (ii) 86, 87 and 95 (p) of the Amending Act, 1989	17 & 17(A)	271, 272A(1) (a) to (c) 272A(2) (c), 274 & 275	Amendments of penalty provisions in the G.T.Act to bring them in line with the corresponding provisions in the Income-tax Act.
5.	(i) 176 of the Amending Act, 1987 (ii) 88 of the Amending Act, 1989	22	246	Amendments to section 22 relating to appeals to the Deputy Commissioner (Appeals) or the Commissioner (Appeals) from the orders of the Assessing Officer.
6.	178 of the Amending Act, 1987	32	320	Amendments to section 32 relating to time for payment of tax demand and charge of interest for delayed payments.
7.	179 (b) of the Amending Act, 1987	33	221-232 Second & Third Schedules	Amendments to section 33 relating to mode of recovery consequent upon the abolition of the post of �Tax Recovery Commissioner�.
8.	(i) 180 (I) of the Amending Act, 1987, (ii) 90 (a) of the Amending Act 1989	33A(1)	240	Amendments to section 33A(1) relating to refund on appeals, etc.
*9.	182 of the Amending Act, 1987	36	131	Amendments to section 36 relating to power to take evidence on oath, etc.
10.	183 of Amending Act, 1987	37		Amendments to section 37 relating to power of the gift-tax authorities to call for information returns and statement.
*11.	(i) 184 of the Amending Act, 1987, (ii) 93 & 94(t) of the Amending Act, 1989	45		Amendments to section 45 relating to non-application of the provisions of Gift-tax Act in certain cases.

*Notes : (i) Sections 175 and 177 of the Amending Act, 1987 had introduced new sections 18B and 22A in the Gift-tax Act to provide for charging of additional gift-tax @ 20% of gifts and for moving an application by the assessee before the Deputy Commissioner (Appeals) or the Commissioner (Appeals) for deciding an issue before completion of assessment. These new sections have, however, been omitted by the Amending Act, 1989. This has been discussed in para 2.6 ante and items at Sl. Nos. 10 and 11 in the Table given in that para.

(ii) The amendments indicated at Sl. Nos. 4, 9 and 11 of the above Table, which are star-marked, are further explained in the following paras.

Direct Tax Laws (Amendment) Act, 1987-IV

Amendments to sections 17 and 17A, relating to penalties under the Gift-tax Act, by the Amending Act, 1987 and the Amending Act, 1989

Sections 17 and 17A of the Gift-tax Act, contain provisions for levy of penalties under the Gift-tax Act, which are on the same lines as those in sections 18 and 18A of the Wealth-tax Act. The Amending Act, 1987 and the Amending Act,1989 have made amendments to the said sections 17 and 17A of the Gift-tax Act on the same lines as the amendments made to sections 18 and 18A of the Wealth-tax Act (refer para 21 ante). The effect is that the penalty provisions contained in sections 17 and 17A of the Gift-tax Act and in sections 18 and 18A of the Wealth-tax Act are on similar lines, including the reduced time limit for imposition of penalties under section 17 of the Gift-tax Act and under section 18 of the Wealth-tax Act. It may be mentioned that under the old provisions of section 17 of the Gift-tax Act,there were no limitation provisions, so that the penalties leviable under this section did not get time-barred. However, limitation provisions have now been introduced in section 17 of the Gift-tax Act on the same lines as in section 18 of the Wealth-tax Act.

There are, however, no limitation provisions in section 17A of the Gift-tax Act as well as in section 18A of the Wealth-tax Act.

[Section 174 of the Amending Act, 1987]

[Sections 86, 87 and 95(p) of the Amending Act, 1989]

Direct Tax Laws (Amendment) Act, 1987-IV

Amendments to section 36, relating to power to take evidence on oath, etc., by the Amending Act, 1987 and by the Finance Act, 1988

Section 36 of the Gift-tax Act contains provisions corresponding to the provisions of section 131 of the Income-tax Act and section 37 of the Wealth-tax Act. The Amending Act, 1987 and the Finance Act, 1988 have amended section 36 of the Gift-tax Act to bring the provisions of sub-sections (1) and (1A) of the section on the same lines as the provisions of sub-sections (1) and (1A) of section 131 of the Income-tax Act and the provisions of sub-sections (1) and (1A) of section 37 of the Wealth-tax Act, as discussed in paras 9.1 to 9.3 and 22 ante.

[Section 182 of the Amending Act, 1987]

[Sections 70 and 80(k) of the Finance Act, 1988]

Direct Tax Laws (Amendment) Act, 1987-IV

Amendments to section 45, relating to the non-application of the provisions of the Gift-tax Act in certain cases, by the Amending Act, 1987 and by the Amending Act, 1989

27.1 Under the old provisions of section 45 of the Gift-tax Act, it was provided that the provisions of this Act shall not apply to gifts made by�

(i) any Govt. company, Govt. corporation or other company which is not a private company, as listed in clauses (a) to (d) of the section;

(ii) any company to an Indian company in a scheme of amalgamation;

(iii) any institution or fund, income whereof is exempt from income-tax under section 11 or section 12 of the Income-tax Act.

Direct Tax Laws (Amendment) Act, 1987-IV

27.2 This section started with the opening words �The provisions of this Act shall not apply to gifts made by�. The purpose of enactment of section 45 is that no gift-tax should be levied in respect of gifts made by Govt. companies and corporations, public limited companies and public charitable and religious trusts. The intention of the section would be more clear if the section starts with the opening words �No tax shall be levied under this Act in respect of gifts made by�. It may be mentioned that these opening words have been used in the corresponding section 45 of the Wealth-tax Act.

Direct Tax Laws (Amendment) Act, 1987-IV

27.3 Further the object of the section to exempt all Govt. companies and corporations and public limited companies from the purview of the Gift-tax Act will be achieved if, instead of listing all these in clauses (a) to (d), it is simply stated that the gift-tax shall not be levied on a �company in which the public are substantially interested�. As per the amended section 2(vii) of the Gift-tax Act, this expression has the same meaning as in section 2 of the Income-tax Act, which is wide enough to cover all such Govt. corporations and companies and public companies.

Direct Tax Laws (Amendment) Act, 1987-IV

27.4 Therefore, to achieve the aforesaid objectives, the Amending Act, 1987 and the Amending Act, 1989 have amended section 45 of the gift-tax Act. The combined effect of the amendments made by both the Amending Acts is that the following changes have been made in the said section 45:-

(i) The opening words �The provisions of this Act shall not apply to gifts made by� have been substituted by the opening words �No tax shall be levied under this Act in respect of gifts made by�.

(ii) Clauses (a) to (d) have been substituted by a single clause (a), which refers to �a company in which the public are substantially interested�. Thus the benefit of exemption under this section is extended to all companies in which the public are substantially interested, which expression, according to its definition, in section 2(vii), has the same meaning as in section 2 of the Income-tax Act.

(iii) Consequential amendments have also been made in clause (da) and Explanation II (which is renumbered asExplanation I, while Explanation I has been omitted.

[Section 184 of the Amending Act, 1987]

[Sections 93 and 95(t) of the Amending Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-I

[as amended by Direct Tax Laws (Amendment) Act, 1989]

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-III

IV

Amendments at a glance

DIRECT TAX LAWS (AMENDMENT) ACT, 1987-IV

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