Circular No. 108-Income Tax dated 20-3-1973

FINANCE ACT, 1972 – CIRCULAR NO. 108, DATED 20-3-1973

Amendments at a glance

Section/Schedule	Particulars
	Finance Act
2 and 1st Sch.	Rate structure 3-5
	Income-tax Act
2(24)(iva), 12,	Changes in the provisions relating to exemption from tax
12A, 13(1) and	of the income of charitable and religious trusts 15-19
its Expln./(2)
(g)/(3)(cc) to
(e)/Expln. 1,
139(4A),
164(2)/(3)
2(24)(ix),	Taxation of casual and non-recurring incomes – Winnings
10(3), 56(2)(ib),	from lotteries, crossword puzzles, races, card games
74A, 80TT,	etc. 6, 7
207(1), 208(1)
(a), 209(a)(ii),
211(1), Expln.
212(1)
10(10)	Tax treatment of gratuities 24
10(25)	Exemption from income-tax of income of approved gratuity funds 25
54C	Withdrawal of exemption in respect of capital gains arising from transfer of personal jewellery 28
80C(2)(v)	Deduction in respect of long-term savings in specified media – Area of tax incentives widened 12-14
80G(5),	Donations to charitable trusts or institutions 20-22
Expln. 2
80-1, 80B(7)	Withdrawal of relief in respect of specified priority
and 6th Sch.	industries 8
80Q, 80L(1)(ix)	Withdrawal of deduction in respect of dividends from co-operative societies 9
90, 228A	Provisions for enabling the Central Government to enter into tax treaties with foreign countries for exchange of information for preventing evasion or avoidance of taxes and recovery thereof 23
132A(4)(a),	Increase in the rate of interest chargeable from assessees,
201(1A), 213,	and also payable to assessees by Government under the
prov., 214(1),	provisions of the Act 27
215(1), 216,
217(1)/(1A),
220(2), 243(1),
244(1) and
rule 60 of 2nd
Sch.
139(1)(a), 8(a)	Curtailment of time allowed for filing returns of
along with its	income and modification of the provisions relating to
prov. and	charging of interest for delay in furnishing such
Expln. 1	returns 26
194B	Deduction of income-tax from payments in respect of lottery and crossword puzzle prizes 10
194C	Deduction of income-tax from payments to contractors and sub-contractors resident in India 11
252(4)	Appointment of Vice-Presidents of Appellate Tribunal 31
295(2)(mm)	Powers to make rules for admission of additional evidence
and rule 46A	29-30
	Wealth-tax Act
2(ha), 45(g)	Exemption of co-operative societies from wealth-tax 32
5(1)(xviic)/	Exemption from wealth-tax of recognised provident
(xviid)	funds, approved superannuation funds and gratuity funds 33
5(1)(xxxi),	Exemption from wealth-tax of assets forming part of
(xxxii)	an industrial undertaking 34
5(3), Expln.	Concession in regard to holding period of exempt assets 35
21A	Forfeiture of exemption from wealth-tax in the case of public charitable or religious trusts and institutions 36-37
31(2), 34A(3)	Increase in the rate of interest chargeable from or payable to assessees 38
44A, 32	Extension of scope of tax treaties between the Central Government and the Government of a foreign country 39-40
45(opening	Application of other provisions not barred in the case of
para)	exempted entities 42
46(2)(cc) and	Power to make rules for admission of additional evidence 41
rule 5A
	Gift-tax Act
32(2), 33A(3)	Increase in the rate of interest chargeable from or payable to assessees 43
44	Extension of scope of tax treaties between the Central Government and the Government of a foreign country 44
45(e) and	Exemption of gifts made to charitable or religious insti-
Expln. 3(i)/(ii)	tutions or funds 45
46(1)(cc) and	Powers to make rules for admission of additional
rule 5A	evidence 49
	Surtax Act
24A	Extension of scope of tax treaties between the Central Government and the Government of a foreign country 50
25(1)(cc) and	Power to make rules for admission of additional evidence 51
rule 8A

Rate Structure

Finance Act, 1972

Rates of income-tax for the assessment year 1972-73

3. The rates of income-tax for the assessment year 1972-73 in the case of all categories of taxpayers (corporate as well as non-corporate) are specified in Part I of the First Schedule to the Finance Act, 1972. In the case of taxpayers other than companies, the rates are the same as were specified in Part III of the First Schedule to the Finance (No. 2) Act, 1971, for purposes of computation of �advance tax�. Deduction of tax at source from �salaries� and retirement annuities payable to partners of registered firms engaged in specified professions and computation of the tax payable in certain special cases, during the financial year 1971-72.

In the case of the Life Insurance Corporation of India and other companies, the basic rates of income-tax on incomes assessable for the assessment year 1972-73 are the same as those laid down in Part III of the First Schedule to the Finance (No. 2) Act, 1971, for the purpose of computation of �advance tax� during the financial year 1971-72. The income-tax payable by these entities will, however, be increased by a surcharge on income-tax calculated at the rate of 2.5 per cent on such income-tax. The provision for the levy of surcharge on income-tax has been made in the context of the levy of surcharge at the rate of 2.5 per cent of income-tax payable in advance by all companies during the financial year 1971-72 under the Companies (Surcharge on Income-tax) Act, 1971, enacted in December 1971. These rates have been laid down in Paragraphs E and F of Part I of the First Schedule to the Finance Act, 1972.

The rates of income-tax have been summarised in Annexure I to this circular.

Finance Act, 1972

Rates for deduction of tax at source during the financial year 1972-73 from incomes other than �salaries� and retirement annuities

4. The rates for deduction of tax at source during the financial year 1972-73 from incomes other than �salaries� and retirement annuities payable to partners of registered firms engaged in specified professions are set forth in Part II of the First Schedule to the Finance Act, 1972. In the context of the provision made in the Income-tax Act for deduction of income-tax at source from income by way of winnings from lotteries and crossword puzzles, the Finance Act, 1972 lays down the rates for deduction of income-tax not only from interest on securities, other categories of interest, dividends and other categories of non-salary income of non-residents, but also for deduction of tax from income by way of winnings from lotteries and crossword puzzles. Under another amendment made in the Income-tax Act, income-tax will be deductible at source from payments made to contractors and sub-contractors in certain cases. The rates prescribed in the Finance Act, 1972 in respect of categories of income which were already liable to such deduction also differ from the rates specified in Part II of the First Schedule to the Finance (No. 2) Act, 1971 for the purposes of deduction of tax at source from such incomes during the financial year 1971-72 in certain respects. The changes made by the Finance Act, 1972 are briefly explained hereinbelow :

Payments in respect of lottery and crossword puzzle prizes to residents other than companies – In the case of income by way of winnings from lotteries and crossword puzzles payable to resident recipients other than companies during the financial year 1972-73, tax will be deductible at the rate of 34.5 per cent made up of basic income-tax of 30 per cent and surcharge of 4.5 per cent (being 15 per cent of the income-tax). In view of a specific provision made in the new section 194B inserted by section 28 of the Finance Act, 1972, income-tax will be deductible only where the payment exceeds Rs. 1,000. It is also provided in that section that no deduction will be made from winnings from lotteries and crossword puzzles where the payment is made before 1-6-1972.

The provisions of the new section 194B have been explained in paragraph 10 of this circular.

Payments to contractors and sub-contractors resident in India – Under the new section 194C, inserted by section 28 of the Finance Act, 1972, income-tax will be deductible at source from income comprised in payments made by the Central Government or any State Government, local authorities, statutory corporations and companies to contractors engaged for carrying out any work or for supplying labour for carrying out such work. Income-tax will be deductible at 2 per cent of such payments. Similarly, deduction will be made from payments made by contractors other than individuals and Hindu undivided families, to sub-contractors at the rate of 1 per cent of the payment. No deduction would, however, be required to be made if the consideration for the contract or the sub-contract does not exceed Rs. 5,000 or where the payment is made before 1-6-1972. In view of the position that the rates for deduction of tax at source in respect of payments to contractors and sub-contractors have been laid down in the Income-tax Act, no specific provision in this regard has been made in Part II of the First Schedule.

The provisions of the new section 194C have been explained in detail in paragraph 11 of this circular.

Payments of income to domestic companies – In respect of interest other than �interest on securities� payable to a domestic company, the rate for deduction will be 21 per cent, made up of income-tax at 20 per cent and surcharge at 1 per cent (5 per cent of income-tax) as against 20 per cent formerly. In respect of any other income (excluding interest payable on a tax-free security), tax will be deducted at the rate of 23 per cent (made up of income-tax at 22 per cent and surcharge at 1 per cent) as against 22 per cent hitherto. The increase in these rates is being made in the context of the levy of surcharge on income-tax in the case of companies as explained in paragraph 3 of this circular.

Payments of income to foreign companies – In the case of income payable to a foreign company, income-tax deductible at source as hitherto has been increased by a surcharge on income-tax of 5 per cent. The rates for deduction of income-tax and surcharge in the case of foreign companies will, therefore, stand as under :

	Income-tax%	Surcharge%
a. on income by way of dividends payable by any domestic company	24.5	1.225
b. on income by way of royalties payable by an Indian concern in pursuance of approved agreements	50	2.5
c. on income by way of fees payable by Indian concerns for rendering technical services under approved agreements	50	2.5
d. on income by way of interest payable on tax-free securities	44	2.2
e. on any other income	70	3.5

It will be seen that the rates for deduction of basic income-tax in the case of foreign companies are the same as laid down in Part II of the First Schedule to the Finance (No. 2) Act, 1971.

Finance Act, 1972

Rates for deduction of tax at source from �salaries�, computation of �advance tax� and charging of income-tax in special cases during the financial year 1972-73

5. The Finance Act, 1972 follows the principle adopted in the Finance Acts of the preceding years that in prescribing the rates of tax and in making new provisions in the taxation laws which have the effect of bringing about a change in the tax liability or which provide tax incentive or disincentive in any sphere should apply to current incomes falling due for assessment in the next following assessment year, and not retrospectively to incomes earned in the past except where there are special circumstances justifying the retrospective operation of any particular provision. In conformity with this principle, changes in the rates of tax which were considered necessary or desirable have been made operative prospectively in relation to incomes of the financial year 1972-73 or other accounting period which would be relevant for the assessment year 1973-74. The rates for deduction of tax at source from �salaries� in the case of individuals during the financial year 1972-73 and for the computation of �advance tax� payable during that year in the case of all categories of taxpayers during the said financial year are specified in Part III of the First Schedule to the Finance Act, 1972. These rates apply also for the purposes of deduction of tax at source during the financial year 1972-73 from retirement annuities payable under section 80E(9) to partners of registered firms engaged in specified professions and for charging or calculating income-tax payable in certain special cases. These special cases are : section 132(5), first proviso [calculating income-tax on undisclosed income represented by seized assets in certain cases]; section 172(4) [levy of tax on provisional basis on the income of non-residents from shipping of cargo or passengers from Indian ports] ; section 174(2) [assessment of persons leaving India] ; section 175 [assessment of persons likely to transfer property to avoid tax] ; section 176(2) [assessment of profits of discontinued business]. The rates of income-tax and surcharge applicable in the case of individuals, Hindu undivided families and all other non-corporate taxpayers are the same as specified in Part I of the First Schedule for the assessment of incomes liable to tax for assessment year 1972-73. In the case of the Life Insurance Corporation of India and other companies, however, while the basic rates of income-tax are the same as the rates of income-tax specified in Part I of the First Schedule for incomes assessable for the assessment year 1972-73, the income-tax calculated at these rates will be increased by a surcharge on income-tax of 5 per cent as against 2.5 per cent applicable in respect of incomes assessable for the assessment year 1972-73.

The rates for deduction of tax at source from �salaries�, computation of �advance tax� and charging income-tax in special cases during the financial year 1972-73 have been summarised in Annexure II to this circular.

AMENDMENTS TO INCOME-TAX  ACT

MEASURES FOR RAISING ADDITIONAL REVENUE

FINANCE ACT, 1972

Taxation of casual and non-recurring incomes

6. Under the provisions of the Income-tax Act, receipts, which are of a casual and non-recurring nature, are exempt from tax except where the receipts constitute capital gains or arise from a business or the exercise of profession, vocation or occupation or are by way of additions to the remuneration of an employee. In view of this exemption, no tax is currently chargeable in respect of winnings from lotteries, crossword puzzles, races, card games or from gambling or betting. The exemption from tax of such receipts is not in keeping with the principle of taxing equally persons with equal capacity to pay. The exemption also provides scope for tax evasion and conversion of �black� money into �white� by ascribing income, which would normally be taxable, to winnings from lotteries, races, card games, etc. The Finance Act, 1972 has made the following amendments to the Income-tax Act with a view to withdrawing the exemption currently available in respect of casual and non-recurring receipts :
7. The definition of �income� in section 2(24) has been amended to specifically provide that winnings from lotteries, crossword puzzles, races including horse races, card games and other games of any sort or from gambling or betting of any form or nature whatsoever will be regarded as income for purposes of the Income-tax Act. [Section 3(b)(ii) of the Finance Act]
8. Winnings from state or other lotteries in the case of non-corporate tax-payers will be taxed on a concessional basis in the same manner as long-term capital gains relating to assets other than lands and buildings. Under the new section 80TT, the whole of the income by way of lottery winnings will be allowed as deduction in computing the taxable income where the gross total income of the assessee does not exceed Rs. 10,000 or where winnings do not exceed Rs. 5,000. In other cases, a deduction equal to Rs. 5,000plus 50 per cent of the balance will be allowed in computing the taxable income. A consequential amendment has also been made to section 80A. [Sections 14 and 22 of the Finance Act]
9. Clause (3) of section 10 has been substituted by a new clause. The effect of this change will be that casual and non-recurring receipts, other than winnings from lotteries, which are in excess of Rs. 1,000 in a year, will be included in the total income in the case of all categories of assessees and charged to tax at normal rates. The exemption of the first Rs, 1,000 of income will, however, not be available in respect of capital gains, receipts arising from business or exercise of profession, vocation, or occupation or receipts by way of addition to remuneration of an employee and such income will continue to be chargeable to tax on the existing basis. It should, however, be noted that receipts which are of a casual and non-recurring nature, will be liable to income-tax only if they can properly be characterised as �income� either in its general connotation or within the extended meaning given to the term by the Income-tax Act. Hence, gifts of a purely personal nature will not be chargeable to income-tax, except when they can be regarded as an addition to the salary or when they arise from the exercise of a profession or vocation. Similarly, capital assets inherited or acquired on partition will not also be liable to income-tax. [Section 4(a) of the Finance Act]
10. A new clause (ib) has been added to sub-section (2) of section 56 to provide that winnings from lotteries, crossword puzzles, races, card games, other games or from gambling or betting will be chargeable to tax under the head �Income from other sources�. Accordingly, expenditure, not being in the nature of capital expenditure, incurred wholly and exclusively for the purpose of making or earning such income will be allowed as deduction in computing the income from the aforesaid sources. [Section 10 of the Finance Act]
11. A new section 74A has been inserted in the Income-tax Act. Under this section, losses from lotteries, crossword puzzles, races, card games, etc., will be allowed to be set off only against income from the same source. Losses relating to these sources incurred in one year will also not be allowed to be carried forward to be set off against income of a subsequent year. For this purpose, each of the following sources will be regarded as a separate and distinct source :
12. lotteries ;
13. crossword puzzles ;
14. races, including horse races ;
15. card games ;
16. other games of any sort ;
17. betting or gambling of any form or nature not falling under any of the foregoing items.

Thus, while losses from bridge may be set off against winnings from any other card game, these will not be set off against income from any other source. Consequential amendments have been made to sections 75 and 77.

[Sections 11, 12 and 13 of the Finance Act]

6. By virtue of the amendment made to section 207, income by way of winnings from lotteries, crossword puzzles, races including horse races, card games, other games or from gambling or betting will not be included in the �income subject to advance tax� and, accordingly, no �advance tax� will be payable in respect of income from the aforesaid sources. Consequential changes have also been made to sections 208, 209, 211 and 212. [Sections 33 to 37 of the Finance Act]

FINANCE ACT, 1972

7. The provisions set forth in the preceding paragraph have come into force with effect from 1-4-1972. It has, however, specifically been provided in section 59 of the Finance Act, 1972 that income by way of casual and non-recurring receipts will continue to be exempt from income-tax for the assessment year 1972-73 to the same extent as hitherto. [Section 59 of the Finance Act]

 FINANCE ACT, 1972

Withdrawal of relief in respect of specified priority industries

8. Under section 80-I, income derived by certain domestic companies from specified priority industries is charged to tax on a concessional basis. The priority industries specified in this behalf comprise :
9. a. the business of generation or distribution of electricity or any other form of power ;
10. the business of construction, manufacture or production of any one or more of the articles or things specified in the list in the Sixth Schedule ; and
11. the business of any hotel, where such business is carried on by an Indian company and the hotel is, for the time being, approved in this behalf by the Central Government.

The concessional taxation of profits from these industries is brought about by allowing a deduction of a certain percentage of such profits in computing the taxable income of the domestic company. The amendments made by the Finance (No. 2) Act, 1971 reduced this percentage from 8 per cent to 5 per cent and also curtailed the scope of the application of this section by omitting some items from the list of articles and things in the Sixth Schedule. The Finance Act, 1972 has altogether omitted section 80-I, thus wholly withdrawing the concession available to priority industries under that section from 1-4-1973, i.e., for and from the assessment year 1973-74.

Consequential amendments have been made in section 80B and section 80J and the Sixth Schedule has also been omitted from 1-4-1973.

[Sections 15, 18, 19 and 43 of the Finance Act]

 FINANCE ACT, 1972

Withdrawal of deduction in respect of dividends from co-operative societies

9. Under section 80Q, dividends received by an assessee from a co-operative society are completely exempt from income-tax without any ceiling limit. This exemption facilitates tax avoidance by persons who would otherwise earn taxable income by arranging to carry on their activities through the medium of one or more co-operative societies. This special concession in respect of dividends from co-operative societies has, therefore, been withdrawn by omitting section 80Q. Such dividends have, however, been included in the categories of financial assets income wherefrom qualifies for deduction up to Rs. 3,000 in the aggregate in the hands of an individual or a Hindu undivided family by adding a new clause (ix) to sub-section (1) of section 80L.

The above changes will take effect from 1-4-1973 and will, accordingly, apply to the assessment year 1973-74 and onwards.

[Sections 20 and 21 of the Finance Act]

ENLARGEMENT OF THE SCOPE OF PROVISIONS RELATING
TO DEDUCTION OF TAX AT SOURCE

The Finance Act, 1972 has introduced two new sections 194B and 194C with a view to widening the field of collection of income-tax by deduction at source. The substance of the provisions of these two new sections is explained below :

 FINANCE ACT, 1972

Deduction of income-tax from payments in respect of lottery and crossword puzzle prizes

10. As explained in paragraph 6 of this circular, the Finance Act, 1972 has made several modifications in the scheme of tax exemption of casual and non-recurring receipts. The effect of these modifications, inter alia, is that winnings from lotteries and crossword puzzles will become chargeable to income-tax from the assessment year 1973-74 onwards. Under a provision made in the new section 194B, every person responsible for paying any income by way of winnings from any lottery or crossword puzzle in an amount exceeding Rs. 1,000 is required to deduct income-tax thereon at the rates prescribed in this behalf in the Finance Act of the relevant year. Consequential changes have also been made in sections 197, 198, 199, 200, 202, 203, 204 and 205 with a view to placing the tax deducted at source from lottery and crossword puzzle prizes on a par with the tax deducted from other categories of income in certain respects. These provisions apply in the case of resident as well as non-resident taxpayers. The main features of these provisions are explained below :
11. No tax will be deducted at source where the prize is Rs. 1,000 or less or where the payment is made before 1-6-1972.
12. Where the prize is given partly in cash and partly in kind, income-tax will be deductible from the cash prize with reference to the aggregate amount of the cash prize and the value of the prize in kind. Where, however, the prize is given only in kind, no income-tax will be required to be deducted.
13. Income-tax will be deductible from prizes given after 31-5-1972 even if the relevant draw in respect of a lottery or, as the case may be, the competition in respect of a crossword puzzle may have been held on or before that date.
14. Where the lottery or crossword puzzle prize is paid in instalments, the deduction will be made at the time of actual payment of each instalment.
15. In the case of any person other than a company, it will be open to the recipient of the prize to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax, as may be appropriate in his case. The application for the purpose has to be made in Form No. 13B prescribed in the Income-tax Rules. The certificate issued by the Income-tax Officer will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier.
16. In view of the existing provision in section 288B, the amount of tax to be deducted at source should be rounded off to the nearest rupee by ignoring amount less than 50 paise and increasing the amount of 50 paise or more to one rupee.
17. The tax deducted by or on behalf of Government should be paid to the credit of the Central Government on the same day by book adjustment. In other cases, tax deducted should be paid to the credit of the Central Government within one week from the date of such deduction or the date of receipt of the challan by the person making the deduction, as the case may be.
18. The person responsible for making deduction of income-tax under section 194B is required to issue a certificate showing therein the amount of the lottery or crossword prize, the amount of tax deducted at source and other prescribed particulars, in Form No. 19B prescribed in the Income-tax Rules, 1962.
19. The person responsible for making deduction of income-tax is also required to furnish to the Income-tax Officer having jurisdiction to assess him a quarterly statement in Form No. 26B on 15th June, 15th October, 15th January and 15th April in respect of the deductions made during the immediately preceding quarter. Such a return is, however, not required to be sent if the tax is deducted by or on behalf of Government.

[Sections 28, 29, 30, 31 and 32 (part) of the Finance Act and the Income-tax (Third Amendment) Rules, 1972 (part)]

 FINANCE ACT, 1972

Deduction of income-tax from payments to contractors and sub-contractors resident in india

11. The Finance Act, 1972 has introduced a new section 194C with a view to providing for deduction of income-tax at source from income comprised in payments made to contractors and sub-contractors in certain cases. The broad effect of the new provision is that a person responsible for paying any sum to a resident contractor for carrying out any work or supplying labour for carrying out any work in pursuance of a contract with the Central Government, State Government, local authority, statutory corporation or a company will be required to deduct income-tax at the rate of 2 per cent from any such sum paid after 31-5-1972. Similarly, a contractor, not being an individual or a Hindu undivided family, will in certain cases, be required to deduct tax at the rate of 1 per cent from any payment made by him to a resident sub-contractor after that date. Consequential changes have also been made in sections 198, 199, 200, 202, 203, 204, 205, 209 and 215 with a view to placing the tax deducted at source from payment made to contractors and sub-contractors on a par with tax deducted from other categories of income in other respects. This substance of the new provisions is explained hereunder :
12. In the case of contractors, deduction of income-tax under the new provision will be made only where the payment is made by the Central Government or a State Government or a local authority or a corporation established by or under a Central, State or Provincial Act, or by a company (such authority, corporation or company being hereinafter referred to as �specified person�) and the contractor is a person resident in India. The deduction of income-tax at source from payments made to non-resident contractors will continue to be governed by the existing provision in section 195.
13. The deduction of income-tax will be made from sums paid for carrying out any work or for supplying labour for carrying out any work. In other words, the new provision will apply only in relation to �works contracts� and �labour contracts� and will not cover contracts for sale of goods. Since contracts for the construction of buildings or dams or laying of roads and air-fields or railway lines or erection or installation of plant and machinery are in the nature of contracts for work and labour, income-tax will have to be deducted from payments made in respect of such contracts. Similarly, contracts granted for processing of goods supplied by Government or any other specified person, where the ownership of such goods remains at all times with the Government or such person, will also fall within the purview of the new section. The same position will obtain in respect of contracts for fabrication of sea and river crafts where materials are supplied by the Government or any other specified person and the fabrication work is done by a contractor. Where, however, the contractor undertakes to supply any sea or river crafts fabricated according to the specifications given by Government or any other specified person and the property in such sea and river crafts passes to the Government or such person only after such crafts are delivered, the contract will be a contract for sale and, as such, outside the purview of the new provision. In case of doubt whether a particular contract is a contract for work and labour or for sale, the matter should be decided in the light of the principles laid down by the Supreme Court in the State of Punjab v.Associated Hotels of India Ltd. [1972] 29 STC 474.
14. Contracts for rendering professional services by lawyers, physicians, surgeons, engineers, accountants, architects, consultants, etc., cannot be regarded as contracts �for carrying out any work� and accordingly, no deduction of income-tax will be made from payments relating to such contracts.
15. A transport contract cannot ordinarily be regarded as �contract for carrying out any work� and, as such, no deduction in respect of income-tax is required to be made from payments made under such a contract. In the case of a composite contract involving transport as well as loading and unloading, the entire contract will be regarded as �works contract� and income-tax will have to be deducted from payments made thereunder. Where, however, the element of labour provided for loading and unloading is negligible, no income-tax will be deductible.
16. Service contracts not involving the carrying out of any work are outside the scope of the provision.

The requirement does not also apply in relation to payments made for hiring of equipments, rental, etc. Similarly, the requirement does not apply in relation  to payments made to banks for discounting bills, collecting/receiving payments through cheques/drafts, opening and negotiating letters of credit, etc. As regards payments made to port trusts, payments other than lighterage charges paid to port trusts will not attract the provision of the section. It is, however, to be noted that a port trust, being a local authority, is exempt from income-tax in respect of income accruing from the supply of a service within its own jurisdictional area and, as such, lighterage charges received by it will not be liable to tax in its own hands. The port trust could, therefore, obtain a certificate from the Income-tax Officer under section 194C(4) and thus receive payments without deduction of tax at source.

6. The provision relating to deduction of tax from payments made to contractors and sub-contractors are wide enough to cover not only written contracts but also oral contracts.
7. The deduction of income-tax will be made at the time of credit of the sum to the account of the contractor, or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier. In a case where advance payments are made during the execution of a works contract and such payments are to be adjusted at the time of final settlement of accounts, tax is required to be deducted at the time of making advance payments.
8. The question whether deduction under the new provision will be made with reference to gross payment due to the contractor or the net payment, i.e., gross payment minus deduction, if any, on account of materials supplied by Government or other specified persons will have to be decided in the light of the terms of the particular contract and the conduct of the parties thereto. Where the contractor has undertaken to construct a building or a dam, and the Government or other specified person has undertaken to supply all or any of the materials necessary for the work at stipulated prices, the deduction will have to be related to the gross payment without excluding any adjustments on account of cost of materials. Where, however, the contractor has undertaken only to provide the labour for the work, the ownership of the materials supplied remaining at all times with the Government or other specified persons, the sum payable to the contractor in respect of the contract will only be the amount paid for such labour or services and will thus not include the price of the materials supplied by the Government or other specified persons.
9. No deduction will be required to be made if the consideration for the contract does not exceed Rs. 5,000 or where the payment is made before 1-6-1972. In this connection, it should be noted that the deduction of tax under section 194C is required to be made in cases where the payment is made after 31-5-1972 even though the contract in respect of which the payment is made has been entered into on or before that date.
10. Where a contractor, not being an individual or a Hindu undivided family, engaged for carrying out any work or for supplying labour for carrying out such work by the Central Government or a State Government, a local authority, a corporation established under a Central, State or Provincial Act or a company has in turn, engaged any sub-contractor, (a) for carrying out the whole or any part of the work undertaken by the contractor, or (b) for the supply of labour to carry out such work, or (c) for supplying any labour which the contractor had undertaken to supply, he will be required to deduct income-tax at source from payment made to the sub-contractor. The provisions governing payments to contractors as set forth at items (7), (8) and (9) will apply, mutatis mutandis, to payments made by contractors to sub-contractors.
11. The rate of deduction of income-tax from payments made by the Government or other specified persons to any contractor will be 2 per cent of the gross payment or, as the case may be, the net payment, depending on the terms of the contract as explained in item (8) above. Similarly, the rate of deduction in the case of payments to sub-contractors will be 1 per cent.
12. The provisions of section 194C(2) relating to deduction of income-tax at source from payments made to a sub-contractor by a contractor are applicable only where the contractor is a resident person referred to in section 194C(1), that is to say, he has taken a contract for carrying out any work, or for supply of labour for carrying out any work, from the Central Government or any State Government, local authority, a statutory corporation or a company.
13. It is open to the contractor or the sub-contractor, as the case may be, to make an application to the Income-tax Officer concerned and obtain from him a certificate authorising the payer to deduct tax at such lower rate or deduct no tax as may be appropriate to his case. The application for the purpose has to be made in Form No. 13C prescribed in the Income-tax Rules, 1962. The certificate issued by the Income-tax Officer will be valid for the period specified therein unless it is cancelled by the Income-tax Officer earlier.
14. In view of the existing provision in section 288B, the amount of tax to be deducted at source should be rounded off to the nearest rupee by ignoring amount less than fifty paise and increasing amount of fifty paise or more to one rupee.
15. The tax deducted by or on behalf of the Government should be paid to the credit of the Central Government on the same day by book adjustment. In other cases the tax deducted at source is required to be paid to the credit of the Central Government within the following time limits :
16. where the relevant sum is credited by a person carrying on a business or profession to the account of the payee as on the date up to which the accounts of such business or profession are made, within two months of the expiration of the month in which that date falls ;
17. in any other case, within one week from the last day of the month in which the deduction is made.
18. The persons responsible for making deduction of tax from any payment to a contractor or a sub-contractor, as the case may, is required to issue a certificate showing therein particulars of the payment, the amount of tax deducted at source, etc., in Form No. 19C prescribed in the Income-tax Rules, 1962.
19. The person responsible for making deduction of income-tax is also required to furnish to the Income-tax Officer having jurisdiction to assess him a quarterly statement in Form No. 26C on 15th June, 15th October, 15th January and 15th April in respect of the deductions made during the immediately preceding quarter. Such return is, however, not required to be sent if the tax is deducted by or on behalf of Government.

[Sections 28, 30, 31, 32, 35 and 38 (part) of the Finance Act and Income-tax (Third Amendment) Rules, 1972 (part)]

INCENTIVES FOR SAVINGs

FINANCE ACT, 1972

Deduction in respect of long-term savings in specified media

12. With a view to widening the area of tax incentives for savings, section 80C has been amended so as to provide that contributions made by an individual out of his income chargeable to tax for participation in the Unit-linked Insurance Plan of the Unit Trust of India will qualify for the special deduction currently available in respect of long-term savings through specified media,e.g., life insurance, recognised provident funds, etc., the deduction will be available only in relation to the contributions made by the assessee himself as a member of the Plan and not by his spouse or children. This is because under the scheme of the Plan, minors are not allowed to participate in the Plan, and a woman would be eligible for participation only if she has a regular income of her own. The deduction will also be available in respect of contributions made by any one member of an association of persons or body of individuals consisting only of husband and wife governed by the system of community of property in force in the Union territories of Dadra and Nagar Haveli and Goa, Daman and Diu. Hindu undivided families will, however, not be entitled to the new concession.

FINANCE ACT, 1972

13. In order to prevent misuse of the concession, it has been provided that where a member participating in the Unit-linked Insurance Plan withdraws from the Plan before paying contributions for a period of five years, no deduction will be allowed in respect of the contributions made in the year of withdrawal. Further, an amount equal to the aggregate of the deductions allowed in respect of contributions to the Plan in the past years will be included in his total income of the previous year in which he withdraws from the Plan. For this purpose, the deduction allowed in respect of contributions made in any previous year will be the difference between the amount by which the total deduction actually allowed in that year exceeds the deduction which would have been allowed if no such contributions had been made in that year. In other words, the contributions will be related to the top slab of the qualifying amount of savings in the relevant year.

FINANCE ACT, 1972

14. The tax concession in relation to contributions to the Unit-linked Insurance Plan will become effective from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years.

[Section 16 of the Finance Act]

MEASURES FOR PLUGGING LOOPHOLES IN THE LAW
LEADING TO TAX AVOIDANCE

FINANCE ACT, 1972

Changes in the provisions relating to exemption from tax of the income of charitable and religious trusts

15. The Finance Act, 1970 made certain important changes in the scheme of taxation of the income of charitable or religious trusts and institutions with effect from 1-4-1971. Under the provisions of the Income-tax Act, as amended by the Finance Act, 1970, income from property held under trust wholly for charitable or religious purposes is exempt from income-tax to the extent such income is applied to the purposes of the trust in India in the same year or within a period of 3 months immediately following. A similar exemption is available also in cases where property is held under trust in part only for charitable or religious purposes, provided that the trust was created before 1-4-1962. In both these types of trusts, any income which is not so applied is allowed to be accumulated or set apart for future application to charitable or religious purposes without attracting tax liability, if the trust complies with certain procedural requirements laid down in this behalf. These requirements are that (a) the trust or institution should give notice to the Income-tax Officer specifying the purpose for which the income is to be accumulated and the period for which the accumulation is proposed to be made, and (b) the income so accumulated should be invested in Government or other approved securities or deposited in Post Office Savings Bank, scheduled banks, co-operative banks or approved financial corporations. The maximum period of such accumulation is 10 years and if the accumulated income is not applied to the purposes for which it was accumulated within one year of the expiry of the 10-year period, the exemption is lost and tax is chargeable on the accumulated income. The exemption from tax is also forfeited, in the case of a trust or institution created or established after 31-3-1962, if under the terms of the trust or the rules governing the institution, any part of the trust income enures for the direct or indirect benefit of specified persons, such as, the founder of the trust, substantial contributor to the trust or any relative of such founder or contributor. In the case of a trust or institution, whenever created or established the exemption is forfeited also if its income or property is used or applied during the relevant year for the direct or indirect benefit of such persons. An exception is, however, made in the case of trusts or institutions created or established before 1-4-1962, if the use of the income or property for the benefit of the specified persons is in compliance with any mandatory provision in the terms of the trust or the rules governing the institution. Under specific provisions made in the Act, the trust income or property is regarded as having been used or applied for the benefit of such persons if the trust or institution engages in any of the following transactions:

(a)  lending of the income or property of the trust or institution to any one of the specified persons without either adequate security or adequate interest or both ;

(b)  making available land, building or other property of the trust or institution, for the use of any of the specified persons without charging adequate rent or other compensation;

(c)  payment of excessive remuneration to any of the specified persons for services rendered by him to the trust or institution;

(d)  making the services of the trust or institution available to any of the specified persons without adequate remuneration or other compensation;

(e)  purchase of shares, securities or other properties for the trust or institution from any of the specified persons for more than adequate consideration;

(f)  sale of shares, securities or other property of the trust or institution to any of the specified persons for less than adequate consideration;

(g)  diversion of a subtantial portion of the income or property of the trust or institution in favour of any of the specified persons ;

(h)  investment of the trust funds in any concern in which any of the specified persons has a substantial interest.

If the quantum of investment referred to in (h) above does not exceed 5 per cent of the capital of the concern, the trust or institution forfeits exemption from tax only in respect of the income arising from such investment.

FINANCE ACT, 1972

16. 16. Voluntary contributions received by charitable or religious trusts and institutions and applicable solely to religious or charitable purposes are also exempt from tax. Various conditions laid down in section 11, such as, application of income to charitable or religious purposes within the specified period, accumulation of the unspent income in the specified manner, and the provisions relating to the forfeiture of tax exemption in certain circumstances mentioned above, however, do not apply to income by way of voluntary contributions except where such contributions are received from a charitable or religious trust or institution which itself claims exemption from tax.

FINANCE ACT, 1972

17. In order to ensure that the tax exempt funds of charitable and religious trusts or institutions are applied to the purposes of such trusts and institutions and are not diverted for the benefit of author of the trust, founder of the institution, persons who have made substantial contribution or who manage the affairs of the trust or institution, the Finance Act, 1972 has made the following amendments in the scheme of tax exemption of such trusts and institutions.
18. The definition of �income� in section 2(24) has been amended, to specifically provide that voluntary contributions received by a charitable or religious trust or institution, regardless of whether such trust or institution has been created or established wholly or partly for charitable or religious purposes, will be regarded as income for purposes of the Income-tax Act. Contributions received with a specific direction that they will form part of the corpus of the trust or institution will, however, not be treated as income. For this purpose, the term �trust� will include any other legal obligation.
19. Where such voluntary contributions are received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes, these contributions will, for purposes of sections 11 and 13, be regarded as income derived from property held under trust wholly for charitable or religious purposes.

[Section 12 as substituted by section 6 of the Finance Act, 1972 and section 13 as amended by section 7(a)(i) of the Finance Act, 1972]

The effect of the modifications at (1) and (2) above would be as follows:

n  Income by way of voluntary contributions received by private religious trusts will no longer be exempt from income-tax.

n  Income by way of voluntary contributions received by a trust for charitable purposes or a charitable institution created or established after 31-3-1962 (i.e., after the commencement of the Income-tax Act, 1961) will not qualify for exemption from tax if the trust or institution is created or established for the benefit of any particular religious community or caste.

n  Income by way of voluntary contributions received by a trust created partly for charitable or religious purposes or by an institution established partly for such purposes will no longer be exempt from income-tax.

n  Where the voluntary contributions are received by a trust created wholly for charitable or religious purposes or by an institution established wholly for such purposes, such contributions will qualify for exemption from income-tax only if the conditions specified in section 11 regarding application of income or accumulation thereof are satisfied and no part of the income enures and no part of the income or property of the trust or institution is applied for the benefit of persons specified in section 13(3), e.g., author of the trust, founder of the institution, a person who has made substantial contribution to the trust or institution, the relatives of such author, founder, person, etc. In other words, income by way of voluntary contributions will ordinarily qualify for exemption from income-tax only to the extent it is applied to the purposes of the trust during the relevant accounting year or within three months next following. Such charitable or religious trusts will, however, be able to accumulate income from voluntary contributions for future application to charitable or religious purposes for a maximum period up to 10 years, without forfeiting exemption from tax, if they comply with certain procedural requirements laid down in section 11 in this behalf. These  requirements are that (1) the trust or institution should give notice to the Income-tax Officer, specifying the purpose for which the income is to be accumulated and the period for which the accumulation is proposed to be made, and (2) the income so accumulated should be invested in Government or other approved securities or deposited in post office savings banks, scheduled banks, co-operative banks or approved financial institutions.

3. 3. The list of persons referred to in sub-section (3) of section 13 has been enlarged by including therein trustees of trusts, managers of institutions, their relatives and concerns in which such trustees, managers and relatives have a substantial interest. The effect of this amendment will be that where any income of the trust or institution created or established after 31-3-1962 (e., after the coming into force of the Income-tax Act, 1961) enures for the benefit of trustees, managers, etc., the trust or institution will forfeit exemption from tax. Likewise, where any income or property of the trust or institution is used or applied during the relevant account year for the direct or indirect benefit of trustees, managers, etc., exemption from income-tax will be forfeited irrespective of whether the trust or institution was created or established before or after the commencement of the Income-tax Act. An exception is, however, made in the case of trusts or institutions created or established before 1-4-1962, if the use of the income or property for the benefit of specified persons is in compliance with any mandatory provision in the terms of the trust of the rules governing the institution.
4. The scope of the expression �relative� for purposes of section 13 has been enlarged so as to include relatives through marriage. �Relative� will now mean (1) spouse of the individual, (2) brother or sister of the individual, (3) brother or sister of the spouse of the individual, (4) any lineal ascendant or descendant of the individual, (5) any lineal ascendant or descendant of the spouse of the individual, (6) spouse of a person referred to in (2),(3),(4) and (5) above, and (7) any lineal descendant of a brother or sister of either the individual or of the spouse of the individual. The effect of this provision will be that relatives through marriage of the author, founder, substantial contributor, trustee or manager will be included in the list of persons specified in section 13(3).
5. 5. Under the existing clause (g) of sub-section (2) of section 13, a charitable or religious trust or institution forfeits exemption from tax if a �substantial portion� of the income or property of the trust or institution is diverted during the relevant account year in favour of any person referred to in section 13(3). This provision has been modified to provide that exemption from income-tax under this provision will be lost if the aggregate of the income or property diverted in favour of any such person, during the relevant account year, exceeds Rs. 1,000.
6. Under the new section 12A, exemption from income-tax in respect of income derived from property held under trust or by way of voluntary contributions by charitable or religious trusts or institutions will be available only if the following conditions are fulfilled:

The person in receipt of the income makes an application for registration of the trust or the institution to the Commissioner of Income-tax before 1-7-1973 or before the expiry of a period of one year from the date of creation of the trust or establishment of the institution, whichever is later. The Commissioner of Income-tax is, however, empowered to admit, in his discretion, belated applications for registration in deserving cases. The application for the purpose has to be made in Form No. 10A and should be accompanied by the original instrument under which the trust is created or the institution is established together with a copy thereof. In the case of a trust which has not been created under an instrument or an institution which has not been established under an instrument, the document evidencing the creation of the trust or establishment of the institution may be sent, together with a copy thereof. In either case, if the original instrument or document cannot conveniently be produced, the Commissioner of Income-tax would be empowered to accept a certified copy in lieu of the original. The application should ordinarily be accompanied by two copies of the accounts for each one of the three years prior to the year in which the application is made. Where, however, the trust or institution was not in existence in any of the three prior years or the accounts for any such year have not been made up, copies of the accounts for such year or years need not be submitted along with the application.

Where the total income of the trust or institution (without giving effect to the provisions of sections 11 and 12) exceeds Rs. 25,000 in any previous year, the accounts of the trust or institution for that year have been audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies. The report of audit should be in Form No. 10B prescribed in the Income-tax Rules, 1962.

7. Under the new Explanation inserted in sub-section (1) of section 13, it has specifically been provided that in determining whether any part of the income or property of the trust or institution has been used for the benefit of any specified person during any period before 1-7-1972, the amendments now made in section 13, barring, of course, the Explanation itself, will be ignored.
8. 8. Consequential amendments have also been made in sub-sections (2) and (3) of section 164 relating to charge of tax in cases where the whole or a part of the income of the assessee consists of income derived from property held under trust for charitable or religious purposes.

FINANCE ACT, 1972

18. Under sub-section (4A) of section 139, every person in receipt of income derived from property held under trust or other legal obligation wholly for charitable or religious purposes, or in part only for such purposes, is required to furnish voluntarily the return of income if the total income in respect of which he is assessable as a representative assessee, without giving effect to the provisions of section 11 relating to application of income, exceeds the maximum amount not liable to income-tax. This provision has been amended so as to provide that the return of income will have to be filed even in cases where the income including voluntary contributions received by the trust or institution exceeds such limit.

FINANCE ACT, 1972

19. The modifications set forth in the preceding two paragraphs will take effect from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years.

[The Wealth-tax Act has also been amended to provide that in a case where any part of the corpus or income of a charitable or religious trust is used for the benefit of the author of the trust, a substantial contributor to the trust and any other specified person, the trust will be liable to pay wealth-tax on its net wealth at a flat rate of 1.5 per cent or the appropriate rate applicable to such net wealth, whichever is higher. This provision has been explained separately in paragraph 37 of this circular.]

[Sections 3(b), 5, 6, 7, 26(c) and 27 of the Finance Act and rules 17A and 17B of the Income-tax Rules, 1962 inserted by the Income-tax (Amendment) Rules, 1973]

 FINANCE ACT, 1972

Donations to charitable trusts or institutions

20. 20. Under section 80G, donations to charitable or religious institutions qualify for a tax concession, subject to certain conditions. One of these conditions is that where the institution or fund derives any income, such income should not be liable for inclusion in its total income under the provisions of section 11 or section 12. The tax concession is, however, not denied merely on either or both of the following grounds:
21. That, subsequent to the donation, any part of the income or fund has become chargeable to tax due to non-compliance with any of the provisions of section 11 relating to application or accumulation of income in the specified manner.
22. That the exemption under section 11 is denied to the institution or fund in relation to any income arising to it from any investment made in a concern in which the persons specified in section 13(3) have a substantial interest, where the investment in such a concern does not exceed 5 per cent of the capital of the concern.

FINANCE ACT, 1972

21. In view of the position that under the amendments made by the Finance Act, 1972, income by way of voluntary contributions received by a charitable or religious trust will also be subject to the same requirements as are currently applicable in respect of the income derived from property held under trust, consequential changes have been made in the provision relating to the tax concession in respect of donations to such trusts.

Explanation 2 below sub-section (5) of section 80G has, accordingly, been amen-ded to provide that the tax concession to the donor in respect of the donation will not be denied also in a case where the trust or institution forfeits exemption on account of non-compliance with the requirements of application or accumulation of voluntary contributions in the specified manner where the default takes place after the donation is made. Similarly, the tax concession will not be denied merely because the trust or institution forfeits exemption in respect of its income by way of voluntary contributions on the ground that the funds of the trust or institution have been invested in a prohibited concern provided, however, the investment in such concern does not exceed 5 per cent of its capital. Further, the tax concession will also not be denied by reason of the fact that the trust or institution forfeits exemption from income-tax due to non-fulfillment of the condition specified in new section 12A.

FINANCE ACT, 1972

22. The modifications in the preceding paragraph will take effect from 1-4-1973 and will, accordingly, apply in relation to assessments for the assessment year 1973-74 and subsequent years.

[Section 17 of the Finance Act]

PROVISIONS FOR ENABLING THE CENTRAL GOVERNMENT TO
ENTER INTO TAX TREATIES WITH FOREIGN COUNTRIES FOR
EXCHANGE OF INFORMATION FOR PREVENTING EVASION
OR AVOIDANCE OF TAXES AND RECOVERY THEREOF

FINANCE ACT, 1972

Substitution of section 90

23. Under section 90, the Central Government is empowered to enter into an agreement with the Government of any foreign country for the avoidance of double taxation of income and to make provisions for implementing the agreement by the issue of a notification in the Official Gazette. Some of the taxpayers having transactions with outside countries resort to dubious methods for evading their liability under the tax laws. Tax evasion is thus closely linked with transactions involving over-invoicing and under-invoicing in import and export business operations through secret foreign bank accounts and smuggling of valuable articles into and out of India. Cases of taxpayers who thwart the attempts of the administration to collect tax dues by either retaining their assets abroad or transferring them secretly outside India are also not unknown. With a view to enabling the tax administration to tackle the problem of tax evasion having international ramifications, the Finance Act, 1972 has substituted a new section for the existing section 90 in order to empower the Central Government to enter into agreements with foreign countries not only for purposes of avoidance of double taxation of income but also for enabling the tax authorities to exchange information for the prevention of evasion or avoidance of taxes on income or for investigation of cases involving tax evasion or avoidance or for recovery of taxes in foreign countries on a reciprocal basis.

A consequential change has also been made in the provisions of the Income-tax Act relating to recovery of arrears of taxes by inserting a new section 228A. Where the tax treaty provides for the recovery of taxes due to the Government of one treaty country in the other and the Government of the foreign country or any authority specified in this behalf in the tax treaty sends to the Central Board of Direct Taxes a certificate for the recovery of any tax due in the foreign country, the Board has been empowered to send the certificate to the Tax Recovery Officer within whose jurisdiction the property of the defaulter is situated and thereupon the Tax Recovery Officer will proceed to recover the dues in the manner specified in the Income-tax Act. Likewise, if a taxpayer in India has property in the foreign country, the Income-tax Officer will be able to send a certificate to the Board certifying the amount of arrears due from the taxpayer and thereupon the Board will take action for the recovery of the dues in the foreign country in accordance with the terms of the tax treaty.

The Companies (Profits) Surtax Act, the Wealth-tax Act and the Gift-tax Act also contain similar provisions enabling the Central Government to enter into agreements with foreign countries for the avoidance of double taxation with respect to taxes levied under these Acts. The corresponding provisions in these Acts have also been brought in line with the provisions of the Income-tax Act.

The above modifications have come into force with effect from 1-4-1972.

[Sections 23 and 39 of the Finance Act]

Other Amendments

FINANCE ACT, 1972

Tax treatment of gratuities

24. 24. Under clause (10) of section 10, death-cum-retirement gratuity received under the revised pension rules of the Central Government or under any similar scheme of a State Government, a local authority, or a statutory corporation is completely exempt from tax. Similarly, retirement gratuity received under the new pension code applicable to members of the Defence Services also qualifies for tax exemption without any ceiling limit. In the case of any other gratuity, the exemption is available to the extent such gratuity does 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 is paid, or fifteen months� salary so calculated or Rs. 24,000, whichever is the least. No ceiling limits in regard to death-cum-retirement gratuity received by civilian Government servants and retiring gratuity received by members of the Defence Services have been prescribed in the law because such gratuities are subject to ceiling limits under the relevant rules which are similar to those specifically laid down in the Act. No ceiling limits have also been laid down in respect of the exempt amount of gratuities received by employees of statutory corporations as the schemes under which these gratuities are paid are broadly on the lines of the gratuities payable to Government servants. On nationalisation, banks and other undertakings have come within the category of statutory corporations. The gratuity schemes of some of these banks and undertakings do not have any monetary ceiling in respect of gratuities payable thereunder or the monetary ceiling is substantially higher. This, therefore, creates an invidious distinction between the employees of such statutory corporations and those in the private sector. Further, whereas in the case of Government servants, gratuities are paid only on retirement or death, persons in private employment may receive gratuities from time to time even while they continue in service. The present wording of the relevant provision is wide enough to confer exemption in respect of gratuities which are paid otherwise than on retirement or death. With a view to removing these anomalies in the tax treatment of gratuities received by different categories of employees, the following modifications have been made in clause (10) of section 10 :
25. 1. Exemption from income-tax in respect of gratuities received by employees of statutory corporations and employees in the private sector will be available only if such gratuities are received on retirement, incapacitation or death of the employee or on termination of his employment
26. 2. The exempt amount of gratuities in the case of employees of statutory corporations and those in the private sector will be subject to a ceiling limit of 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 is paid, or fifteen months� salary so calculated or Rs. 24,000, whichever is the least.

This change will take effect from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years.

[Section 4(b) of the Finance Act]

 FINANCE ACT, 1972

Exemption from income-tax of income of approved gratuity funds

25. Under clause (25) of section 10, income of provident funds to which the Provident Funds Act, 1925 applies, recognised provident funds and approved superannuation funds, is completely exempt from income-tax. Such exemption is, however, not available in respect of the income of approved gratuity funds. The approved gratuity funds are subject to regulation under the Income-tax Rules and the pattern of investment made by such funds is also prescribed under these rules. With a view to encouraging the formation of approved gratuity funds and thus safeguarding the interest of employees in general, section 10(25) has been amended to provide for exemption of the income of approved gratuity funds from tax.

This change will take effect from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years.

[Section 4(c) of the Finance Act]

 FINANCE ACT, 1972

Curtailment of time allowed for filing returns of income and modification of the provisions relating to charging of interest for delay in furnishing such returns

26. Under sub-section (1) of section 139, every person having a taxable income from sources other than business or profession is required to furnish voluntarily the return of his income before 30th June of the relevant assessment year. In the case of an assessee deriving income from business or profession, the return is required to be furnished before the expiry of six months from the end of the previous year or before 30th June of the assessment year, whichever is later. Under sub-section (2), the Income-tax Officer has the power to issue a notice to any person requiring him to furnish his return of income within 30 days of the date of service of the notice and this notice can curtail the time allowed for furnishing the voluntary return. In case the return of income is not furnished before 1st October of the assessment year, the taxpayer is ordinarily liable to pay simple interest at 9 per cent per annum from the 1st day of October to �the date of furnishing of the return. Where, however, the total income of the assessee includes any income from business or profession, the previous year in respect of which expired after 31st December of the year immediately preceding the assessment year, the interest is reckoned from the 1st day of January instead of the 1st day of October of the assessment year. In view of these provisions, an assessee can delay his return of income for a period ranging from three months to almost six months without attracting any liability to pay interest for the period of delay. Further, under section 140A, where the tax payable on the basis of the return filed by an assessee exceeds Rs. 500, the assessee is required to pay tax on the basis of self-assessment within 30 days of furnishing the return. In case of default in paying the tax on the basis of self-assessment within the time allowed, a penalty up to a maximum of 50 per cent of the amount of tax due is exigible. The effect of these provisions is that if an assessee furnishes his return of income within the time allowed under section 139(1), he is required to pay the tax due on the basis of the return within 30 days of furnishing such return. If, however, he does not furnish the return within the time allowed but delays it either after obtaining an extension from the Income-tax Officer or otherwise, he does not have to pay any tax on self-assessment basis until he files the return. Further, where the return is due by 30th June, the assessee can delay it up to 30th September even without attracting any liability to interest for delay in furnishing the return. Where the assessee derives income from a business or profession and closes his accounts after 31st December of the previous year preceding the assessment year, the return can be delayed up to 31st December of the assessment year without attracting any liability to interest. In view of this position, there is tendency on the part of assessees not only to delay the returns of income uptill the due date under section 139(1) but also to request for extension of time, sometimes, on frivolous grounds. The time limit for completion of assessments has been reduced from four years to two years recently and with the introduction of the scheme of summary assessments, the pendency of arrear assessments has also been reduced considerably. It is, therefore, necessary in the interest of proper management of assessment work that bulk of the returns are received early in the assessment year. With the twin objectives of ensuring early receipt and withdrawing the in-built incentive for delaying the returns, the following modifications have been made in the provisions of the Income-tax Act:
27. 1. Clause (a) of sub-section (1) of section 139 has been amended requiring assessees having income from business or profession to furnish returns of income voluntarily within four months (as against six months at present) of the close of the accounting year or by 30th June following that year, whichever is later.

For all other categories of assessees, the last date for filing the return of income will continue to be 30th June, regardless of the accounting year adopted by them.

2. 2. Clause (a) of sub-section (8) of section 139 has been amended to provide that the interest for delay or default in furnishing the return of income will, in all cases, be charged from the expiry of the due date for furnishing such return voluntarily under section 139(1), whether the return is filed under sub-section (1), sub-section (2) or sub-section (4) of section 139. Thus, where the return is due by 30th June of any assessment year, but is not filed on or before that date, interest will be charged from 1st July of that year.
3. 3. Under the corresponding provision in the Wealth-tax Act, an assessee carrying on a business or profession is required to furnish the return of his net wealth before 30th June of the assessment year or within the period prescribed under the Income-tax Act for furnishing the return of his total income, whichever is later. In view of the above modifications made in the Income-tax Act, the returns of net wealth in such cases will also become due on 30th of June or within four months of the expiry of the relevant account year, whichever is later.
4. 4. In keeping with the other provisions in the Finance Act, 1972 increasing the rate of interest chargeable from assessees or payable to them from 9 per cent per annum to 12 per cent per annum, the rate of interest for delay or default in furnishing the return has also been increased to 12 per cent per annum.

These modifications are effective from 1-4-1972. Section 60 of the Finance Act, 1972 specifically clarifies that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in cases where the return relates to a year earlier than the assessment year 1972-73 and the default continues after the aforesaid date.

[Section 26(a), (b) and (d) and section 60 of the Finance Act]

 FINANCE ACT, 1972

Increase in the rate of interest chargeable from assessees, and also payable to assessees by Government under the provisions of the Income-tax Act.

27. Simple interest at 9 per cent per annum is chargeable from assessees under certain provisions of the Income-tax Act, e.g., for failure to pay the tax due within the time allowed under the notice of demand, short payment of advance tax, delay in furnishing return of income, etc. Likewise, assessees are entitled to receive simple interest from the Central Government at 9 per cent per annum on excess payment of advance tax and delay in issue of refund. The rate of interest chargeable from, or payable to, assessees under the various provisions of the Income-tax Act has been increased from 9 per cent per annum to 12 per cent per annum with effect from 1-4-1972. These provisions are: sections 132A [now 132B(4)(a)], 201, 213, 214, 215, 216, 217, 220, 243 and 244 and rule 60 of the Second Schedule. Section 60 of the Finance Act, 1974 specifically clarifies that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in those cases where the interest became chargeable or payable from an earlier date.

[Sections 25 and 60 of the Finance Act]

 FINANCE ACT, 1972

Withdrawal of exemption in respect of capital gains arising from transfer of personal jewellery

28. Under section 45, any profits or gains arising from the transfer of a �capital asset� are chargeable to tax. The term �capital asset� as defined in clause (14) of section 2 does not include, inter alia, personal effects, i.e., movable property including wearing apparel, jewellery and furniture held for personal use by the assessee or any member of his family dependent on him. In view of the specific exclusion of jewellery from the definition of �capital asset�, profits and gains arising from the transfer of jewellery held for personal use are not chargeable to income-tax. The exemption of capital gains arising from transfer of jewellery facilitates tax evasion through bogus or inflated claims of sale of jewellery for explaining moneys introduced in business. This exemption has, therefore, been withdrawn making capital gains arising from the transfer of personal jewellery chargeable to income-tax on the same basis as capital gains relating to assets other than lands or buildings. The term �jewellery� has been given the same extended meaning as has been given to it under the Wealth-tax Act and will, therefore, include (a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into any wearing apparel; (b) precious or semi-precious stone, whether or not set in any furniture, utensil or other article and whether or not worked or sewn into any wearing apparel. As it is not intended to levy any tax on capital gains arising from bona fide transfer of jewellery made for the purpose of acquiring any other jewellery for personal use, it has been specifically provided in new section 54C that where such jewellery is acquired within six months of the transfer, any profits and gains arising from the transfer will not be liable to tax if the whole of the full value of the consideration is spent in acquiring the new jewellery. Where only a part of this consideration is used in acquiring new jewellery, a proportionate part of capital gains will not be liable to tax. Consequential amendment has also been made in section 45.

These amendments take effect from 1-4-1973 and will, therefore, apply in relation to assessment year 1973-74 and subsequent years.

[Sections 3(a), 8 & 9 of the Finance Act]

 FINANCE ACT, 1972

Powers to make rules for admission of additional evidence

29. At present, an Appellate Assistant Commissioner of Income-tax has a wide and unrestricted discretion in regard to admission of evidence which is not produced by the assessee before the Income-tax Officer but is produced for the first time in the course of the appellate proceedings. With a view to regulating the admission of such additional evidence, a new clause (mm) has been inserted in sub-section (2) of section 295 so as to empower the Central Board of Direct Taxes to prescribe in the Income-tax Rules the circumstances in which, the conditions subject to which, and the manner in which the Appellate Assistant Commissioner of Income-tax may permit the appellant to produce evidence which was not produced or which was not allowed to be produced before the Income-tax Officer.

A new rule 46A has been inserted in the Income-tax Rules by the Income-tax (Amendment) Rules, 1973. Under this rule the appellant will not be entitled to produce before the Assistant Commissioner any evidence (whether oral or documentary), other than the evidence produced during the course of proceedings before the Income-tax Officer, except in the following circumstances namely :

(a)  where the Income-tax Officer has refused to admit evidence which ought to have been admitted; or

(b)  where the appellant was prevented by sufficient cause from producing the evidence which he was called upon to produce by the Income-tax Officer; or

(c)  where the appellant was prevented by sufficient cause from producing before the Income-tax Officer any evidence which is relevant to any ground of appeal; or

(d)  the Income-tax Officer has made the order appealed against without giving sufficient opportunity to the appellant to adduce evidence relevant to any ground of appeal.

The rule requires the Appellate Assistant Commissioner to record his reasons for admitting the additional evidence and also allow to the Income-tax Officer an opportunity of examining the evidence or document or cross-examine the witness produced by the appellant and also to produce new evidence on his side in rebuttal of the additional evidence produced by the appellant.

The rule specifically provides that the restrictions placed on the production of additional evidence by the appellant will not affect the power of the Appellate Assistant Commissioner to call for the production of any document or the examination of any witness in order to enable him to dispose of the appeal or for any other substantial cause including enhancement of the assessment or penalty or the imposition of penalty under section 271.

These provisions will come into force with effect from 1-4-1973.

[Section 41 of the Income-tax Act and rule 4 of the Income-tax (Amendment) Rules, 1973]

FINANCE ACT, 1972

30. Similar provisions have also been made in the Wealth-tax Act, the Gift-tax Act and the Companies (Profits) Surtax Act.

 FINANCE ACT, 1972

Appointment of a Vice-President or Vice-Presidents of Appellate Tribunal

31. The Income-tax Appellate Tribunal is headed by a President who is appointed by the Central Government from amongst the members of the Tribunal. The President of the Tribunal exercises various statutory functions, such as the constitution of Benches and allocation of work to them, besides administrative control over all members and staff. In order to enable the President to cope with the increasing volume of work, section 252 has been amended with a view to empowering the Central Government to appoint one or more members of the Appellate Tribunal to be the Vice-President or, as the case may be, Vice-Presidents of the Appellate Tribunal. It has also been provided that a Vice-President shall exercise such of the powers and perform such of the functions of the President of the Tribunal as may be delegated to him by the President by a general or special order in writing.

[Section 40 of the Finance Act]

Amendments to Wealth-tax Act

Finance Act, 1972

Exemption of co-operative societies from wealth-tax

32. Under section 3, wealth-tax is chargeable in respect of the net wealth of (i) individuals, (ii) Hindu undivided families, and (iii) companies. Wealth-tax is, however, not being charged in respect of the net wealth of companies from the assessment year 1960-61 onwards in view of a special provision made in this behalf in the Finance Act, 1960. Recently, some doubt has been raised that a co-operative society could, in law, be regarded as an �individual� for purposes of the Wealth-tax Act and charged to tax accordingly. Such an interpretation would not be in keeping with the intention underlying these provisions. Levy of wealth-tax on co-operative societies will also have an adverse effect on the co-operative movement in the country. Section 45 has, therefore, been amended to provide for exemption of co-operative societies from wealth-tax retrospectively from 1-4-1957 (i.e., from the date of commencement of the Wealth-tax Act). A definition of the term �co-operative society� has also been incorporated in the Wealth-tax Act by inserting a new clause (ha) in section 2 and renumbering the existing clause (ha) as clause (hb).

[Sections 44 and 50(b) of the Finance Act]

Finance Act, 1972

Exemption from wealth-tax of recognised provident funds, approved superannuation funds and gratuity funds

33. The Wealth-tax Act does not contain any specific provision for the exemption of recognised provident funds, approved superannuation funds and approved gratuity funds constituted for the benefit of employees. Such funds have, however, not been charged to tax as it was not the intention to bring them within the ambit of the Wealth-tax Act. Because of certain amendments made to the Wealth-tax Act in 1970, relating to taxation of discretionary trusts, a doubt was raised regarding the tax treatment of such funds. The levy of wealth-tax on such funds will substantially erode their corpus and hamper the setting up of such funds for the benefit of employees in the public and private sectors. Section 5 has, therefore, been amended to provide for exemption of provident funds to which the Provident Funds Act, 1925 applies, as also all provident funds, superannuation funds and gratuity funds which are recognised or approved for the purposes of the Income-tax Act. The exemption has been given retrospective effect from 1-4-1957, i.e., the date of commencement of the Wealth-tax Act.

[Section 45(a)(i) of the Finance Act]

Finance Act, 1972

Exemption from wealth-tax of assets forming part of an industrial undertaking

34. The Wealth-tax Act provides for exemption from tax in respect of investments made in specified financial assets up to an aggregate value of Rs. 1,50,000. The specified investments qualifying for this exemption are:
35. Government securities including small savings securities of the Central Government.
36. Fixed deposits with the Central Government as also in Post Offices on Government account and Recurring and Time Deposits in Post Offices.
37. Shares in Indian companies.
38. Notified debentures.
39. Units in the Unit Trust of India.
40. Deposits with banking companies, including co-operative banks, land mortgage banks and land development banks.
41. Deposits with approved financial institutions engaged in providing long-term finance for industrial development in India.
42. Shares in co-operative society.
43. Deposits made by a member of a co-operative society with the society (other than deposits made with a co-operative housing society by a member of the society to whom a building or part thereof is allotted or leased under a house building scheme of the society, which are separately exempted from wealth-tax without any limit to the extent such deposits have been made under the house building scheme of the society).

The Finance Act, 1972 has added two new clauses (xxxi) and (xxxii) to sub-section (1) of section 5 enlarging this list so as to include the value of assets forming part of an industrial undertaking belonging to the assessee, as also the value of his interest in the assets forming part of an industrial undertaking belonging to a firm or an association of persons of which the assessee is a partner or a member. Accordingly, in computing the exemption from wealth-tax up to Rs. 1,50,000, the value of these assets will also be taken into account. The value of any land or building or any rights in any land or building or the value of assets of the industrial undertaking which are otherwise exempt from wealth-tax under section 5(1) will, however, not be taken into account for the purposes of this exemption. �Industrial undertaking� for the purposes of this provision has been defined to mean an undertaking engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining. This provision will take effect from 1-4-1973 and will, therefore, apply for the assessment year 1973-74 and subsequent assessment years. Consequential amendments have also been made to sub-section (1A) of section 5.

[Section 45(a)(ii) and (b) of the Finance Act]

Finance Act, 1972

Concession in regard to holding period of exempt assets

35. Under sub-section (3) of section 5, certain assets qualify for exemption from wealth-tax only if these are held by the assessee for a period of at least six months ending with the relevant valuation date. Some of these assets are (i) deposits in notified schemes framed by the Central Government ; (ii) Government securities ; (iii) shares in Indian companies; (iv) notified debentures ; (v) units in the Unit Trust of India ; (vi) deposits with banking companies, co-operative banks, etc. In the case of shares in a company, the exemption from tax is available if the shares have been held from the date on which these were first issued even if the holding period is less than six months. This restriction has been placed in order to prevent misuse of the tax exemption by changing investments from non-exempt assets to exempt assets for a short period merely to obtain the benefit of the tax concession. This provision, sometimes, results in hardship even in bona fide cases of conversion of one category of exempt assets to another category of exempt assets. For example, an employee receiving the balance to his credit in a recognised provident fund (which is exempt from wealth-tax) and depositing the amount in a bank may forfeit exemption from tax in respect of the amount merely because he has not been able to hold the bank deposit for a period of six months. In order to obviate hardship in such cases, section 5(3) has been amended to provide that in computing the period of six months in relation to any asset, in a case where such asset was acquired by the assessee by conversion of, or in exchange for, or with the proceeds of, or with the money constituting, any other asset exempt from wealth-tax under sub-section (1) or sub-section (2) of section 5, so much of the period for which the assessee held such other asset as falls within the period of twelve months ending with the relevant valuation date, will also be taken into account. This relaxation will be available only if the assessee acquires the relevant asset within thirty days after he ceases to hold the first asset. The concession under this provision will, however, not apply in the case of shares or securities held as stock-in-trade by the assessee for the purposes of his business.

These amendments will take effect from 1-4-1973 and will, therefore, apply for the assessment year 1973-74 and subsequent years.

[Section 45(c) of the Finance Act]

Finance Act, 1972

Forfeiture of exemption from wealth-tax in the case of public charitable or religious trusts and institutions

36. Income derived from property held under trusts or other legal obligation for charitable or religious purposes is exempt from income-tax to the extent such income is applied to such purposes or accumulated for being so applied in accordance with the provisions of the Income-tax Act. Section 13 provides for the forfeiture of the exemption from tax in the case of a trust or institution created or established after 31-3-1962, if under the terms of the trust or the rules governing the institution, any part of the income enures for the direct or indirect benefit of the author of the trust, founder of the institution, a substantial contributor to the trust and their relatives, etc. In the case of a trust or institution, whenever created or established, the exemption is forfeited also where the trust income or property is used or applied during the relevant year for the direct or indirect benefit of such person. This disability does not apply in the case of a trust or institution created or established before 1-4-1962, if the use of the trust income or property is in compliance with a mandatory provision in the terms of trust or rules governing the institution.

Finance Act, 1972

37. Under section 5(1)(i), property held under trust or other legal obligation for any public purpose of a charitable or religious nature in India is exempt from wealth-tax. The Wealth-tax Act, however, does not contain any provision for the forfeiture of the exemption from wealth-tax, on the lines of the aforesaid provisions in section 13 of the Income-tax Act. To provide a further deterrent to the misuse of the income or property of the trust or institution by such persons, the provisions in the Wealth-tax Act, have been brought in line with the provisions in the Income-tax Act. Accordingly, a new section 21A has been introduced to secure that where any part of the income of the trust or institution enures for the direct or indirect benefit of the author of the trust, substantial contributor, etc., or where any income or property of the trust or institution is used or applied, directly or indirectly, for the benefit of any such person, the trust or institution will be liable to pay wealth-tax on the value of its entire property at the rate of 1.5 per cent or the rate applicable in the case of an individual, whichever is beneficial to the Revenue. For the purposes of this provision, it has been specifically provided that any part of the property or income of a trust shall be deemed to have been used or applied for the benefit of any of the specified categories of persons if it can be deemed to have been so used or applied within the meaning of clause (c) of sub-section (1) of section 13 of the Income-tax Act at any time during the period of twelve months ending with the relevant valuation date. Where the trust funds are invested in any concern in which any of the specified persons has a substantial interest, and the quantum of the investment does not exceed 5 per cent of the capital of the concern, the trust or institution forfeits exemption from income-tax only in respect of the income arising from such investment and not its entire income. Similarly, exemption from wealth-tax, in such cases, will be denied only in relation to such investment and other assets will continue to qualify for exemption. The new section 21A takes effect from 1-4-1973 and will, therefore, apply in relation to assessments for the assessment year 1973-74 and subsequent assessment years.

[Section 46 of the Finance Act]

Finance Act, 1972

Increase in the rate of interest chargeable from or payable to assessees

38. Simple interest at 9 per cent per annum is chargeable from assessees on the arrears of tax due from them for the period of the default in payment. Likewise, assessees are entitled to receive simple interest from the Central Government at 9 per cent per annum on the amount of refunds due to them for the period of delay in the issue of refund beyond six months from the date of the order giving rise to the refund. In line with the increase in the rate of interest chargeable from or payable to assessees under the Income-tax Act, sections 31 and 34A have been amended to raise the rate of interest provided therein from 9 per cent per annum to 12 per cent per annum with effect from 1-4-1972. Section 60 of the Finance Act, 1972 specifically clarifies that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in those cases where the interest became chargeable or payable from an earlier date.

[Sections 47 and 60 of the Finance Act]

Finance Act, 1972

Extension of scope of tax treaties between the Central Government and the Government of a foreign country

39. Under section 44A, the Central Government is empowered to enter into an agreement with the Government of any foreign country for the avoidance or relief of double taxation with respect to wealth-tax payable under the Act and under the corresponding law in force in the foreign country. On the lines of the amendments made to the corresponding provisions in the Income-tax Act, the scope of these provisions has also been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of wealth-tax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries.

Finance Act, 1972

40. The new section 228B relating to the recovery of tax in pursuance of agreements with foreign countries inserted in the Income-tax Act under section 39 of the Finance Act, 1972 has also been made applicable to Wealth-tax Act by amending section 32.

[Sections 48 and 49 of the Finance Act]

Finance Act, 1972

Power to make rules for admission of additional evidence

41. The Finance Act, 1972 has amended the Income-tax Act with a view to regulating the admission of evidence which is not produced by the assessees before the Income-tax Officer but is produced for the first time in the course of proceedings before the Appellate Assistant Commissioner. Corresponding amendments have also been made to the Wealth-tax Act by inserting a new clause (cc) in sub-section (2) of section 46 and the Central Board of Direct Taxes has been empowered to prescribe in the Wealth-tax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner of Wealth-tax may permit the appellant to produce evidence which he did not produce or which he was not allowed to produce before the Wealth-tax Officer.

Under the Wealth-tax (Amendment) Rules, 1973, a new rule 5A has been inserted in the Wealth-tax Rules, 1957. This rule is broadly on the lines of rule 46A of the Income-tax Rules, 1962, the scope of which has been explained in paragraph 29 of this circular.

[Section 51 of the Finance Act and rule 2 of the Wealth-tax (Amendment) Rules, 1973]

Finance Act, 1972

Miscellaneous

42. Certain entities enumerated in section 45 have been exempted from wealth-tax. This section has been amended to clarify that while wealth-tax is not to be levied in respect of the net wealth of the entities enumerated in this section, the application of the other provisions of the Act (e.g., calling for evidence from such entities) will not be barred. This amendment is effective from 1-4-1972.

[Section 50(a) of the Finance Act]

Amendments to Gift-tax Act

Finance Act, 1972

Increase in the rate of interest chargeable from or payable to assessees

43. Simple interest at 9 per cent per annum is chargeable from assessees on the arrears of tax due from them for the period of default in payment. Likewise, assessees are entitled to receive simple interest from the Central Government at 9 per cent per annum on the amount of refunds due to them for the period of delay in the issue or refund beyond six months from the date of the order giving rise to the refund. In line with the increase in the rate of interest chargeable from or payable to assessees under the Income-tax Act and the Wealth-tax Act, sections 32 and 33A have also been amended to raise the rate of interest provided therein from 9 per cent per annum to 12 per cent per annum with effect from 1-4-1972. Section 60 of the Finance Act, 1972 specifically clarified that the increase in the rate of interest will apply in respect of any period falling after 31-3-1972, also in those cases where the interest became chargeable or payable from an earlier date.

[Sections 52 and 60 of the Finance Act]

Finance Act, 1972

Extension of scope of tax treaties between the Central Government and the Government of a foreign country

44. On the lines of the amendments made to the corresponding provisions in the Income-tax Act and the Wealth-tax Act, the scope of section 44 has been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of gift-tax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries. The new section 228A relating to recovery of tax in pursuance of agreements with foreign countries inserted in the Income-tax Act has also been applied to the Gift-tax Act by amending section 44 of the Gift-tax Act.

[Sections 53 and 54 of the Finance Act]

Finance Act, 1972

Exemption of gifts made by charitable or religious institutions or funds

45. Section 45(e) excludes from the purview of that Act any gifts made, inter alia, by an institution or fund, the income whereof is exempt from income-tax under section 11 of the Income-tax Act. Under an amendment made to the Gift-tax Act through the Finance (No. 2) Act, 1971, it has been provided that a charitable institution or fund will not forfeit the exemption from gift-tax in respect of gifts made by it merely because (a) subsequent to the gift, any income of the institution or fund becomes chargeable to income-tax due to non-compliance with any of provisions of section 11 of the Income-tax Act relating to application of income during the accounting year itself ; or (b) the institution or fund forfeits exemption in respect of a part of its income which arises from investments made in a concern in which the founder of the institution or fund or his relatives have a substantial interest, where the aggregate of the funds invested by the institution or fund in such a concern does not exceed 5 per cent of the capital of that concern.

Finance Act, 1972

46. Section 12 of the Income-tax Act has been substituted by two new sections 12 and 12A. As already explained, the effect of the substitution of section 12 is that voluntary contributions received by charitable or religious trusts or institutions will qualify for exemption from income-tax only if the conditions specified in section 11 regarding application of income or accumulation thereof are satisfied also in relation to such income by way of voluntary contributions. Further, the trust or institution will forfeit exemption from tax in respect of its entire income if any part of its income enures or any part of its income or property is used or applied directly or indirectly for the benefit of the author of the trust, founder of the institution, a person who has made a substantial contribution to the trust or institution, the relative of such author, founder, etc. The new section 12A provides that exemption from income-tax in respect of income derived from property or by way of voluntary contributions by charitable or religious trusts or institutions will be available only if (a) the trust or institution applies for its registration to the Commissioner of Income-tax within the specified period, and (b) where the total income of the trust or institution (without giving effect to the provisions of sections 11 and 12) exceeds Rs. 25,000 in any previous year, the accounts of the trust or institution for that year have been audited by a chartered accountant or any other accountant entitled to be appointed as an auditor of companies.

Finance Act, 1972

47. In the context of these changes in the Income-tax Act, section 45 has been amended to provide that a charitable institution or fund will not forfeit exemption from gift-tax in respect of gifts made by it merely because (a) subsequent to the gift any income of the institution or fund by way of voluntary contributions becomes chargeable to income-tax due to non-compliance with the provisions of the substituted section 12 of the Income-tax Act ; or (b) the institution or fund is denied exemption from income-tax by reason of the non-fulfilment of the conditions in new section 12A relating to the filing of an application for registration with the Commissioner of Income-tax or the audit of the accounts of the institution or fund by a chartered accountant, etc., or the institution or fund forfeits exemption in respect of its income by way of voluntary contributions on the ground that the funds of the institution or fund have been invested in a prohibited concern provided, however, the investment in such concern does not exceed 5 per cent of its capital.

Finance Act, 1972

48. The changes set forth in the preceding paragraphs will be effective from 1-4-1973 and will, accordingly, apply in relation to the assessment year 1973-74 and subsequent years.

[Section 55 of the Finance Act]

Finance Act, 1972

Powers to make rules for admission of additional evidence

49. At present, an Appellate Assistant Commissioner of Gift-tax has a wide and unrestricted discretion in regard to admission of evidence which is not produced by the assessee before the Gift-tax Officer but is produced for the first time in the course of the appellate proceedings. With a view to regulating the admission of such additional evidence, section 46 has been amended in order to empower the Central Board of Direct Taxes to prescribe in the Gift-tax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner of Gift-tax may permit the appellant to produce the evidence which he did not produce or which he was not allowed to produce before the Gift-tax Officer.

Under the Gift-tax (Amendment) Rules, 1973, a new rule 5A has been inserted. This rule is broadly on the lines of rule 46A of the Income-tax Rules, the scope of which has been explained in paragraph 29 of this circular.

[Section 56 of the Finance Act and rule 2 of the Gift-tax (Amendment) Rules, 1973]

 

Amendments to Companies (Profits) Surtax  Act

FINANCE ACT, 1972

Extension of scope of tax treaties between the Central Government and the Government of a foreign country

50. Section 24A of the Companies (Profits) Surtax Act, which empowers the Central Government to enter into an agreement with the Government of any foreign country for the avoidance or relief of double taxation with respect to surtax payable under that Act and a similar tax under any corresponding law in force in the foreign country has been amended on the lines of the amendments made to the corresponding provisions in the Income-tax Act, the Wealth-tax Act and the Gift-tax Act. The scope of these provisions has been enlarged to empower the Central Government to enter into agreement with the Government of a foreign country also for enabling exchange of information for the prevention of evasion or avoidance of surtax (including investigation of cases of such evasion or avoidance) and for recovery of such tax in the treaty countries. The Central Government has also been empowered to make provisions for implementing the agreement by the issue of a notification in the Official Gazette.

[Section 57 of the Finance Act]

 FINANCE ACT, 1972

Power to make rules for admission of additional evidence

51. In line with the amendments made to the corresponding provisions in the Income-tax Act, the Wealth-tax Act and the Gift-tax Act, section 25 has been amended with a view to empowering the Central Board of Direct Taxes to prescribe in the Companies (Profits) Surtax Rules, the circumstances in which, the conditions subject to which and the manner in which the Appellate Assistant Commissioner may permit the appellant to produce evidence which was not produced or which was not allowed to be produced before the Income-tax Officer.

Under the Companies (Profits) Surtax (Amendment) Rules, 1973, a new rule 8A has been inserted in the Companies (Profits) Surtax Rules. This rule is broadly on the lines of rule 46A of the Income-tax Rules, the scope of which has been explained in paragraph 29 of this circular.

[Section 58 of the Finance Act and rule 2 of the Companies (Profits) Surtax (Amendment) Rules, 1973]

Annexure  I

RATES OF INCOME-TAX AND SURCHARGES ON INCOME-TAX FOR THE
ASSESSMENT YEAR 1972-73

1. TAXPAYERS OTHER THAN COMPANIES
2. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons

Rates of income-tax

(1) where the total income does not exceeds Rs. 5,000	Nil
(2) where the total income does not exceeds Rs. 5,000 but does not exceed Rs. 10,000	10 per cent of the amount by which the total income exceeds Rs. 5,000;
(3) where the total income does not exceeds Rs. 10,000 but does not exceed Rs. 15,000	Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000;
(4) where the total income does not exceeds Rs. 15,000 but does not exceed Rs. 20,000	Rs. 1,350 plus 23 per cent of the amount by which the total income exceeds Rs. 15,000;
(5) where the total income does not exceeds Rs. 20,000 but does not exceed Rs. 25,000	Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000;
(6) where the total income does not exceeds Rs. 25,000 but does not exceed Rs. 30,000	Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000;
(7) where the total income does not exceeds Rs. 30,000 but does not exceed Rs. 40,000	Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000;
(8) where the total income does not exceeds Rs. 40,000 but does not exceed Rs. 60,000	Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000;
(9) where the total income does not exceeds Rs. 60,000 but does not exceed Rs. 80,000	Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000;
(10) where the total income does not exceeds Rs. 80,000 but does not exceed Rs. 1,00,000	Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000;
(11) where the total income does not exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000	Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000;
(12) where   the    total     income exceeds             Rs. 2,00,000	Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000;

Provided that for the purposes of this paragraph, in the case of a Hindu undivided family which at any time during the previous year satisfies either of the following two conditions, namely :

(a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or

(b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family :

(i) no income-tax shall be payable on a total income not exceeding Rs. 7,000 ;

(ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000.

Surcharge on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased by a surcharge for purposes of the Union calculated at the following rates namely :

(a) in a case where the total income does not exceed Rs. 15,000 – 10 per cent;

(b) in any other case – 15 per cent : Provided that the amount of surcharge payable shall, in no case, exceed the aggregate of the following sums, namely :

(i) an amount calculated at the rate of 10 per cent on the amount of income-tax on an income of Rs. 15,000, if such income had been the total income (the income of Rs. 15,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the person concerned); and

(ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000.

2. Co-operative society

Rates of income-tax

(1) where the total income does not exceed Rs. 10,000	15 per cent of the total income;
(2) where the total income exceeds Rs, 10,000 but does not exceed Rs. 20,000	Rs. 15,00 plus 25 per cent of the amount by which the total income exceeds Rs. 10,000;
(3) where the total income exceeds Rs. 20,000	Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 20,000;

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.

3. Registered firms

Rates of income-tax

(1) where the total income does not exceeds Rs. 10,000	Nil
(2) where the total income exceeds Rs. 10,000 but does not exceeds Rs. 25,000	4 per cent of the amount by which the total income exceeds Rs. 10,000;
(3) where the total income exceeds Rs. 25,000 but does not exceeds Rs. 50,000	Rs. 600 plus 6 per cent of the amount by which the total income exceeds Rs. 25,000
(4) where the total income exceeds Rs. 50,000 but does not exceeds Rs. 1,00,000	Rs. 2,100 plus 12 per cent of the amount by which the total income exceeds Rs. 50,000
(5) where the total income exceeds Rs. 1,00,000	Rs. 8,100 plus 20 per cent of the amount by which the total income exceeds Rs. 1,00,000

Surcharges on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of surcharges for purposes of the Union calculated as specified hereunder :

(a)  in the case of a registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income, a surcharge calculated at the rate of ten per cent of the amount of income-tax computed at the rate hereinbefore specified ;

(b)  in the case of any other registered firm, a surcharge calculated at the rate of twenty per cent of the amount of income-tax computed at the rate hereinbefore specified ; and

(c)  a special surcharge calculated at the rate of fifteen per cent on the aggregate of the following amounts, namely :

(i)  the amount of income-tax computed at the rate hereinbefore specified; and

(ii)  the amount of the surcharge calculated in accordance with clause (a), or as the case may be, clause (b) of this sub-paragraph.

Explanation : For the purposes of this paragraph, �registered firm� includes an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-tax Act.

4. Local authorities

Rate of income-tax

On the whole of the total income                      50 per cent.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.

1. COMPANIES
2. In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956

Rates of income-tax

(i) on that part of its total income which consists of profits and gains from life insurance business	52.5 per cent;
(ii) on the balance, if any, of the total income	the rate of income-tax applicable, in accordance with Paragraph F of this part, to the total income of domestic company which is a company in which the public are substantially interested.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge calculated at the rate of two and a half per cent of such income-tax.

2. In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956

Rates of income-tax

1. In the case of a domestic company�

(1) where the company  is a company in which the public are substantially interested-
(i) in a case where the total income does not exceed Rs. 50,000	45 per cent of the total income;
(ii) in a case where the total income exceeds Rs. 50,000	55 per cent of the total income;
(2) where the company is not a company in which the public are substantially interested-
(i) in the case of an industrial company-
(a) on so much of the total income as does not exceed Rs. 10,00,000	55 per cent
(b) on the balance, if any, of the total income	60 per cent
(ii) in any other case	65 per cent of the total income:

Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000, shall not exceed the aggregate of�

(a) the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company) ; and

(b) eighty per cent of the amount by which its total income exceeds Rs. 50,000.

1. In the case of a company other than a domestic company�

(i)  on so much of the total income as consists of�

(a)  royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1961, or

(b)  fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th day of February, 1964,

and where such agreement has, in either case, been approved by the Central Government    50 per cent ;

(ii)  on the balance, if any, of the total income                       70 per cent.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge calculated at the rate of two and a half per cent of such income-tax.

Annexure II

RATES FOR CALCULATING OR CHARGING INCOME-TAX IN CERTAIN CASES
DEDUCTING INCOME-TAX AT SOURCE FROM �SALARIES� AND
RETIREMENT ANNUITIES AND COMPUTING �ADVANCE TAX�
PAYABLE DURING THE FINANCIAL YEAR 1972-73

1. TAXPAYERS OTHER THAN COMPANIES
2. Individuals, Hindu undivided families, unregistered firms, associations of persons (other than co-operative societies), bodies of individuals and artificial juridical persons

Rates of income-tax

(1)  where the total income does not exceed Rs, 5,000	Nil
(2) where the total income exceeds Rs. 5,000 but does not exceed Rs. 10,000	10 per  cent of the amount by which the total income exceeds Rs. 5,000;
(3) where the total income exceeds Rs. 10,000 but does not exceed Rs. 15,000	Rs. 500 plus 17 per cent of the amount by which the total income exceeds Rs. 10,000;
(4) where the total income exceeds Rs. 15,000 but does not exceed Rs. 20,000	Rs. 1,350 plus 23 per cent of the amount by which the total income exceeds Rs. 15,000;
(5) where the total income exceeds Rs. 20,000 but does not exceed Rs. 25,000	Rs. 2,500 plus 30 per cent of the amount by which the total income exceeds Rs. 20,000;
(6) where the total income exceeds Rs. 25,000 but does not exceed Rs. 30,000	Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 25,000;
(7) where the total income exceeds Rs. 30,000 but does not exceed Rs. 40,000	Rs. 6,000 plus 50 per cent of the amount by which the total income exceeds Rs. 30,000;
(8) where the total income exceeds Rs. 40,000 but does not exceed Rs. 60,000	Rs. 11,000 plus 60 per cent of the amount by which the total income exceeds Rs. 40,000;
(9) where the total income exceeds Rs. 60,000 but does not exceed Rs. 80,000	Rs. 23,000 plus 70 per cent of the amount by which the total income exceeds Rs. 60,000;
(`10) where the total income exceeds Rs. 80,000 but does not exceed Rs. 1,00,000	Rs. 37,000 plus 75 per cent of the amount by which the total income exceeds Rs. 80,000;
(11) where the total income exceeds Rs. 1,00,000 but does not exceed Rs. 2,00,000	Rs. 52,000 plus 80 per cent of the amount by which the total income exceeds Rs. 1,00,000;
(12) where the total income exceeds Rs. 2,00,000	Rs. 1,32,000 plus 85 per cent of the amount by which the total income exceeds Rs. 2,00,000;

Provided that for the purposes of this paragraph, in the case of a Hindu undivided family which at any time during the previous year relevant to the assessment year commencing on the 1st day of April, 1973 satisfies either of the following two conditions, namely:

(a) that it has at least two members entitled to claim partition who are not less than eighteen years of age, or

(b) that it has at least two members entitled to claim partition who are not lineally descended one from the other and who are not lineally descended from any other living member of the family :

(i) no income-tax shall be payable on a total income not exceeding Rs. 7,000;

(ii) where the total income exceeds Rs. 7,000 but does not exceed Rs. 7,660, the income-tax payable thereon shall not exceed forty per cent of the amount by which the total income exceeds Rs. 7,000.

Surcharges on income-tax

The amount of income-tax computed in accordance with the preceding provisions of this paragraph shall be increased by surcharge for purposes of the Union calculated at the following rates, namely :

(a) in a case where the total income does not exceed Rs. 15,000 – 10 per cent ;

(b) in any other case – 15 per cent : Provided that the amount of surcharge payable shall, in no case, exceed the aggregate of the following sums, namely :

(i) an amount calculated at the rate of 10 per cent on the amount of income-tax on an income of Rs. 15,000 if such income had been the total income (the income of Rs. 15,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the person concerned) ; and

(ii) 40 per cent of the amount by which the total income exceeds Rs. 15,000

2. Co-operative societies

Rates of income-tax

(1) where the total income does not exceed Rs. 10,000	15 per cent of the total income;
(2) where the total income exceeds Rs. 10,000 but does not exceed Rs. 20,000	Rs. 1,500 plus 25 per cent of the amount by which the total income exceeds Rs. 10,000;
(3) where the total income exceeds Rs. 20,000	Rs. 4,000 plus 40 per cent of the amount by which the total income exceeds Rs. 20,000.

Surcharge on income-tax

The amount of income-tax computed at the rate herein before specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.

3. Registered firms

Rates of income-tax

(1)  where the total income does not exceed Rs. 10,000	Nil;
(2)  where the total income exceeds Rs. 10,000 but does not exceeds Rs. 25,000	4 per cent of the amount by which the total income exceeds Rs. 10,000;
(3) where the total income exceeds Rs. 25,000 but does not exceeds Rs. 50,000	Rs. 600 plus 6 per cent of the amount by which the total income exceeds Rs. 25,000;
(4) where the total income exceeds Rs. 50,000 but does not exceeds Rs. 1,00,000	Rs.2,100 plus 12 per cent of the amount by which the total income exceeds Rs. 50,000;
(5) where the total income exceeds Rs. 1,00,000	Rs. 8,100 plus 20 per cent of the amount by which the total income exceeds Rs. 1,00,000;

Surcharges on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by the aggregate of surcharges for purposes of the Union calculated as specified hereunder:

(a)  in the case of a registered firm whose total income includes income derived from a profession carried on by it and the income so included is not less than fifty-one per cent of such total income, a surcharge calculated at the rate of ten per cent of the amount of income-tax computed at the rate hereinbefore specified;

(b)  in the case of any other registered firm, a surcharge calculated at the rate of twenty per cent of the amount of income-tax computed at the rate hereinbefore specified ; and

(c)  a special surcharge calculated at the rate of fifteen per cent on the aggregate of the following amounts namely :

(i)  the amount of income-tax computed at the rate hereinbefore specified, and

(ii)  the amount of the surcharge calculated in accordance with clause (a), or as the case may be, clause (b) of this sub-paragraph.

Explanation : For the purposes of this paragraph, �registered firm� includes an unregistered firm assessed as a registered firm under clause (b) of section 183 of the Income-tax Act.

4. Local authorities

Rate of income-tax

On the whole of the total income                     50 per cent.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge for purposes of the Union calculated at the rate of fifteen per cent of such income-tax.

1. COMPANIES
2. In the case of the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956

Rates of income-tax

(i) on the part of its total income which consists of profits and gains from life insurance business	52.5 per cent;
(ii) on the balance, if any, of  the total income	the rate of income-tax applicable, in accordance with Paragraph F of this part, to the total income of a domestic company which is a company in which the public are substantially interested.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge calculated at the rate of five per cent of such income-tax.

2. In the case of a company, other than the Life Insurance Corporation of India established under the Life Insurance Corporation Act, 1956

Rates of income-tax

1. In the case of a domestic company�

(I) where the company is a company in which the public are substantially interested-
(i) in a case where the total income does not exceeds Rs. 50,000	45 per cent of the total income;
(ii) in a case where the total income does not exceed Rs. 50,000	55 per cent of the total income;
(2) where the company is not a company in which the public are substantially interested-
(i) in the case of an industrial company-
(a) on so much of the total income as does not exceed Rs. 10,00,000	55 per cent;
(b) on the balance, if any, of the total income	60 per cent;
(ii) in any other case	65 per cent of the total income:

Provided that the income-tax payable by a domestic company, being a company in which the public are substantially interested, the total income of which exceeds Rs. 50,000 shall not exceed the aggregate of�

(a)  the income-tax which would have been payable by the company if its total income had been Rs. 50,000 (the income of Rs. 50,000 for this purpose being computed as if such income included income from various sources in the same proportion as the total income of the company) ; and

(b)  eighty per cent of the amount by which its total income exceeds Rs. 50,000.

1. In the case of a company other than a domestic company�

(i)  on so much of the total income as consists of�

(a)  royalties received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 31st day of March, 1961, or

(b)  fees for rendering technical services received from an Indian concern in pursuance of an agreement made by it with the Indian concern after the 29th day of February, 1964,

and where such agreement has, in either case,

been approved by the Central Government – 50 per cent ;

(ii)  on the balance, if any, of the total income – 70 per cent.

Surcharge on income-tax

The amount of income-tax computed at the rate hereinbefore specified shall be increased by a surcharge calculated at the rate of five per cent of such income-tax.