Circular No. 308-Income Tax dated 29-6-1981

1. Amendments at a glance

Section/Schedule	Particulars
	FINANCE ACT
2 and 1st Sch.	Rate structure 3-5
	INCOME-TAX ACT
10A	Tax holiday for industrial units situated in free trade zones 6
16(i) and	Raising of standard deduction admissible in the case
its prov. (i)	of salaried taxpayers 7
32A(2),	Definition of a “small-scale industrial undertaking” in
[Expln. (2)]	pursuance of the statement of industrial policy 8
80HHA,
[Expln. (b)]
33A(7), prov.	Liberalisation of the provision relating to development allowance 9
36(1)(viii)	Increase in the quantum of aggregate of the deductions in respect of profits transferred to special reserve in the case of approved financial corporations and public housing finance companies 10
42(opening	Tax concession to foreign companies engaged in prospecting
para) prov.	for, or extraction or production of, mineral oils or, natural gas
to clause (b),	in India 11
Expln. 293A
80D(2)	Increase in the quantum of deduction in respect of medical expenses on handicapped dependants 12
80M(1)(a)	Inclusion of certain segments of the electronic industry in the Ninth Schedule 13
80QQ(1), (2)	Extension of the tax concessions to the book publishing industry 14
86(v) (Expln.),	Provisions to counteract tax avoidance through the
167A	medium of multiple associations of persons without share specifications 15
160(1)(v) and	Provision to counteract tax avoidance through
Expln., 164A	creation of oral trusts 16
208(2)(c)	Raising of threshold for payment of advance tax in certain cases 17
252(2)/(2A),	Qualifications of the members of the Appellate Tribunal and
253(6), 256(1),	related matters/enhancement fees for appeal to Tribunal
269C(1)	and reference application to the High Court 18
11th Sch.	List of articles or things of low priority for the purposes of sections 32A and 80CC 19
	WEALTH-TAX ACT
21(1) (Expln.),	Measures to plug loopholes for tax avoidance
through
(4)/Expln. 2,	the medium of oral trusts 20
(4A)
21AA, 41(4)	Measures to plug loopholes for tax avoidance through the medium of associations of persons wherein shares of members are indeterminate or unknown 21
24(4), 26(2),	Enhancement of fees in respect of appeals to the Appellate
27(1)	Tribunal and reference application to the High Court 22
	GIFT-TAX ACT
23(4),	Enhancement of fees in respect of appeals to the Appellate
25(2),26(1)	Tribunal and reference application to the High Court 23
	SURTAX ACT
7A to 7D, 9A	Payment of advance surtax 24
12(6)	Payment of fees in respect of appeals to the Appellate Tribunal 25
24AA	Tax concessions to foreign companies engaged in prospecting for, or extraction or production of, mineral oils in India 26
Expln. to rule	Exclusion of dividends, royalties, etc. 27
1 of 1st Sch.
	INTEREST-TAX ACT
16(6)	Payment of fee in connection with appeal to the Appellate Tribunal 28
	HOTEL RECEIPTS TAX ACT
19(6)	Payment of fee in connection with the appeal to the Appellate Tribunal 29
	COMPULSORY DEPOSIT SCHEME (INCOME-TAX PAYERS) ACT
3(1), 4(1)(iii)	Extension of the compulsory deposit scheme in the case of income-tax payers for another two years 30
8(1A)	Repayment of compulsory deposit 30.2

3. Amendments to Income-tax Act

Finance Act, 1981

Complete tax holiday for industrial units situated in free trade zones – New section 10A

6.1 Under the existing provisions, a partial tax holiday is granted to all categories of assessees in respect of profits made by them from an industrial undertaking newly set up in India. Where the industrial undertaking is set up prior to 1-4-1981, the tax holiday concession consists of exemption from income-tax up to a specified percentage of the capital employed in the undertaking for five initial assessment years, subject to certain conditions. The percentage specified in this behalf was 7.5 per cent in the case of a company and 6 per cent in the case of others. Where an industrial undertaking is set up after 31-3-1981, the assessee who derives profits and gains from the industrial undertaking is entitled to a deduction, in the computation of his taxable income, of 20 per cent of the profits and gains (25 per cent in the case of a company) derived from such industrial undertaking for 8 initial assessment years, while in the case of co-operative societies, the tax holiday is granted for a period of 10 initial assessment years.

Finance Act, 1981

6.2 The Kandla Free Trade Zone was established by the Government of India in 1965 not only as an export promotion venture but also as a pioneering scheme for industrialisation of the under-developed area of Kutch and also for the development of the Kandla Port as a substitute for Karachi. Similarly, the Santacruz Electronics Export Processing Zone was set up near Bombay to promote rapid growth of the electronics industry as also to encourage setting up of 100 per cent export-oriented industries in the electronics sector. Under the existing provisions, assessees who derive profits and gains from new industrial undertakings set up in these free trade zones are entitled to the benefit of partial tax holiday, investment allowance, export markets development allowance, additional depreciation allowance, deduction in respect of industrial undertakings set up in backward areas (for industrial undertakings situated in the Kandla Free Trade Zone) and other incentives available in the case of all industrial undertakings. A number of countries have set up free trade zones to attract investment for industrial growth by offering substantial tax concessions including a complete tax holiday for a specified number of years.

Finance Act, 1981

6.3 With a view to encouraging the establishment of export-oriented industries in the free trade zone, the Finance Act has inserted a new section 10A in the Income-tax Act which makes special provision in respect of newly established industrial undertakings in free trade zones. The main features of the new section 10A are explained in the following paragraphs.

Finance Act, 1981

6.4 The new section provides for a complete tax exemption in respect of the profits and gains derived from an industrial undertaking set up in any free trade zone for a period of five initial assessment years. For this purpose, the expression ýÿfree trade zoneýÿ means the Kandla Free Trade Zone and the Santacruz Electronics Export Processing Zone and includes any other free trade zone which the Central Government may, by notification in the Official Gazette, specify for the purposes of this section. The tax exemption is granted with reference to the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce any article or thing and each of the four immediately succeeding assessment years. The provisions of this section apply to any industrial undertaking which fulfils the following conditions, namely :

1. The industrial undertaking should begin to manufacture or produce any article or thing during the previous year relevant to the assessment year 1981-82 or any subsequent assessment year in any of the free trade zones. (This is subject to the exception explained in paragraph 6.8.)

2. The industrial undertaking should not have been formed by the splitting up or reconstruction of a business already in existence. However, where an industrial undertaking is formed as a result of re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section, the same will qualify for the new tax concession.

3. The industrial undertaking should not have been formed by the transfer to a new business of machinery or plant previously used for any purpose.

Finance Act, 1981

6.5 For the purpose of (3) above, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose if the following conditions are fulfilled, namely :

a. such machinery or plant was not previously used in India ;

b. such machinery or plant is imported into India from a foreign country ; and

c. no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the Indian Income-tax Act, 1922 or the Income-tax Act, 1961 in computing the total income of any person for any period prior to the installation of the machinery or plant by the assessee.

Further this tax concession will not be denied in a case where the total value of used machinery or plant transferred to the new business does not exceed 20 per cent of the total value of the machinery or plant used in that business.

Finance Act, 1981

6.6 The scheme of the new section is that the assessee who avails of the benefit of this tax concession will not be eligible for the other tax concessions in relation to the industrial undertakings in the free trade zone either during the course of the 5-year tax holiday period or at any time after the end of the tax holiday period. To secure this objective, sub-section (4) of the new section 10A has made the following provisions in regard to the computation of the total income of the assessee for the previous year relevant to the assessment year immediately succeeding the last assessment year or the tax holiday period or of any previous year relevant to any subsequent assessment year:

1. The provisions relating to depreciation under section 32, investment allowance under section 32A, development rebate under section 33, expenditure on scientific research under section 35 and capital expenditure in relation to family planning under the first proviso to section 36(1)(ix) shall apply as if every allowance or deduction referred to in that section and relating to or allowable for any of the assessment years comprised in tax holiday period in relation to building, machinery, plant or furniture used for the purposes of the business of the undertaking or any expenditure incurred for the purposes of such business in any of such previous years had been given full effect to for that assessment year itself. The natural consequence of this provision is that any amount representing the unabsorbed depreciation under section 32(2), the unabsorbed investment allowance under section 32A(3)(ii), the unabsorbed capital expenditure on scientific research under section 35(4), or the unexpired capital expenditure in relation to the family planning under the first proviso to section 36(1)(ix) in relation to the tax holiday period will not be carried forward or set off against profits for any subsequent assessment year. In other words, it is presumed that the allowances for depreciation, investment allowance, development rebate, capital expenditure on scientific research or for family planning were fully absorbed by the income of the industrial undertaking in any of the previous years relevant to the five initial assessment years and that no amount of unabsorbed allowance or deduction is to be carried forward to any assessment year following the five-year tax holiday period.

2. No loss under the head ýÿProfits and gains of business or professionýÿ under section 72(1) or under the head ýÿCapital gainsýÿ under section 74(1) and no tax holiday deficiency under section 80J(3) in respect of any of the assessment years comprised in the tax holiday period will, insofar as such loss or deficiency relates to the business of the industrial undertaking, be carried forward or set off in computing the income of the assessment year immediately succeeding the last of the assessment years comprised in the tax holiday period or in any subsequent assessment year.

3. The assessee will not be eligible for deduction under section 80HH (relating to deduction in respect of profits and gains from newly established industrial undertakings in backward areas) or under section 80HHA (relating to deduction in respect of profits and gains from newly established small-scale industrial undertakings in rural areas) or in respect of tax holiday under section 80J or under section 80-I in relation to the profits and gains of the industrial undertaking for any previous year relevant to the assessment year immediately succeeding the last assessment year comprised in the tax holiday period or any subsequent assessment year.

4. In computing the depreciation allowance under section 32, the ýÿwritten down valueýÿ of any asset used for the purposes of the business of the industrial undertaking for the assessment year immediately succeeding the last assessment year comprised in the tax holiday period and every subsequent assessment year will be computed as if the assessee had claimed and had been actually allowed the depreciation allowance for each of the assessment years comprised in the tax holiday period.

Finance Act, 1981

6.7 A special provision has been made in sub-section (7) of the new section 10A to give an option to an assessee who derives profits and gains from an industrial undertaking situated in the free trade zone not to avail of this tax concession. Such an assessee will be required to furnish a declaration in writing before the expiry of the time allowed under section 139(1) or under section 139(2), whether fixed originally or on extension, to furnish the return of income for the first assessment year for which the tax holiday under the new scheme is available to him, that the provisions of this section may not be made applicable to him and if he does so, the provisions of this section 10A will not apply to him for any of the five assessment years for which the tax holiday provisions would have normally applied to him. The dispensation has been made on the consideration that some assessees may find the general tax concessions available in relation to industries in the rest of India more attractive than the new scheme.

Finance Act, 1981

6.8 Sub-section (5) of the new section 10A provides an option to assessees deriving profits and gains from existing industrial undertakings situated in the free trade zone. Accordingly, assessees deriving profits and gains from industrial units set up in any of the previous years relevant to the assessment years 1977-78 to 1980-81 will, at their option, be entitled to claim complete tax holiday for the unexpired period of five years. The tax concession in relation to the existing units is being made optional on the consideration that some assessees may find it more profitable to avail of the general tax concessions which are allowed in relation to new industrial undertakings under the existing provisions. Accordingly, an assessee deriving profits and gains from an industrial undertaking set up in any previous year relevant to the assessment years 1977-78 to 1980-81 will be eligible for the benefit of this tax concession for the unexpired period of the five initial assessment years available in his case. Such an option has to be exercised before the expiry of the time allowed for furnishing of the return of income under section 139(1) or 139(2) for the assessment year 1981-82 by furnishing to the Income-tax Officer, a declaration in writing that the provisions of new section 10A may be made applicable to him for each of the assessment years of the unexpired portion of the five-year period and if he does so, the provisions of sub-section (4) of new section 10A will apply in computing his total income for the previous year relevant to the assessment year immediately succeeding the last assessment year of the tax holiday period and subsequent assessment years.

Finance Act, 1981

6.9 It may be noted that section 10A will apply in relation to all industrial undertakings set up in the free trade zones during the previous year relevant to the assessment year 1981-82 or any subsequent assessment year unless the assessee opts out of the scheme by making a declaration under sub-section (7) within the time allowed under that sub-section. In the case of industrial undertakings set up prior to the previous year relevant to the assessment year 1981-82, however, the provisions of section 10A will apply only if the assessee makes a declaration under sub-section (5) within the time allowed under these sub-sections.

Finance Act, 1981

6.10 The provisions of sub-section (8) and sub-section (9) of section 80-I will also apply in relation to the industrial undertaking referred to in the new section 10A as they apply in relation to an industrial undertaking referred to under section 80-I. Under the applied sub-section (8) of section 80-I, it is provided that where an assessee has several units, some in the free trade zone and some outside, the profits of the unit in the free trade zone will be computed after taking the cost of the goods transferred to or from the unit on the basis of the market value of such goods. The applied sub-section (9) of section 80-I empowers the Income-tax Officer to determine the reasonable profits that could be attributed to the qualifying undertaking in the free trade zone in cases where, owing to the close connection between the assessee and any other person or for any other reason, the course of the business is so arranged that the industrial undertaking set up in the free trade zone derives more than ordinary profits which may be expected to arise in that business. This provision has been made with a view to avoiding abuse of the new tax concessions by manipulation of profits between associate concerns or different units of the same concern.

Finance Act, 1981

6.11 This amendment has come into force with effect from 1-4-1981 and is accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Section 3 of the Finance Act]

Finance Act, 1981

Raising of standard deduction admissible in the case of salaried taxpayers – Section 16

7.1 Under section 16(i), salaried assessees are entitled to a standard deduction in computation of their taxable salary. Prior to the amendment made by the Finance Act, standard deduction was allowed in an amount equal to 20 per cent of the salary up to Rs. 10,000 and 10 per cent of the balance, subject to an overall ceiling of Rs. 3,500. This standard deduction was, however, restricted to Rs. 1,000 in the following cases:

a. where the employee is in receipt of conveyance allowance from his employer, or

b. where he is provided with any motor car, motor cycle, scooter or any other moped by his employer for use otherwise than wholly and exclusively in the performance of his duties, or

c. where he is allowed the use of any one or more motor cars (othewise than wholly and exclusively in the performance of his duties) out of a pool of motor cars owned or hired by the employer.

Finance Act, 1981

7.2 In recent years, there has been a significant increase in the capital cost of motor vehicles as also in the maintenance expenditure on normal running and repairs. In view of this position, and as a means of relief to salaried assessees, the Finance Act has increased the standard deduction at all levels of salary income to 20 per cent of the salary income, subject to the enhanced overall ceiling limit of Rs. 5,000.

Finance Act, 1981

7.3 In the case of an assessee in receipt of conveyance allowance, the amount of expenditure incurred out of such allowance wholly, necessarily and exclusively in the performance of his duties is exempt from income-tax. The excess conveyance allowance granted to an employee is, however, includible in the taxable income of the employee. Hence, in a case where the amount paid in excess of the legitimate requirements has been included in the taxable income, there does not appear to be any justification for restricting the quantum of standard deduction. The Finance Act has accordingly omitted clause (i) of the proviso to section 16(i) so that the standard deduction will not be limited to Rs. 1,000 in the case of employees who are in receipt of conveyance allowance. It may, however, be noted that there is no change in the position regarding the restriction of the standard deduction in the case of salaried employees who have been provided with a motor car, motor cycle, etc., or where he is allowed the use of one or more motor cars out of a pool of motor cars owned or hired by the employer as specified in clause (ii), or clause (iii) of the proviso to section 16(i). In these cases, the standard deduction will be restricted to Rs. 1,000 and the value of the perquisite represented by the provision of a vehicle will have to be determined in accordance with the provisions of the rules. No change has been made in relation to this provision on the consideration that the perquisite represented by the provision of motor car is taxed on a concessional basis.

Finance Act, 1981

7.4 This provision will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Section 4 of the Finance Act]

Finance Act, 1981

Amendment of the definition of a small-scale industrial undertaking in pursuance of the statement on industrial policy – Section 32A and section 80HHA

8.1 Under the existing provisions of the Income-tax Act, the following tax concessions are available in the case of small-scale industrial undertakings, namely :

1. Investment allowance is admissible in respect of any machinery or plant installed in a small-scale industrial undertaking for the purpose of business of manufacture or production of any article or thing including an article or thing of low priority specified in the list in the Eleventh Schedule to the Income-tax Act [section 32A(2)(b)(ii)].

2. An assessee is entitled to deduction, in the computation of his taxable income, of an amount equal to 20 per cent of the profits and gains derived from a small-scale industrial undertaking set up in a rural area for 10 initial assessment years [section 80HHA].

3. An assessee owning a small-scale industrial undertaking is entitled to a deduction, in the computation of his taxable income, of an amount equal to 20 per cent of profits and gains (25 per cent in the case of a company) derived from a small-scale industrial undertaking which may be engaged in the manufacture or production of any article or thing, including an article or thing of low priority specified in the list in the Eleventh Schedule to the Income-tax Act, for 8 initial assessment years (10 years in the case of a co-operative society) [section 80-I(2), second proviso].

Finance Act, 1981

8.2 For the purposes of the tax concessions referred to above, a ýÿsmall-scale industrial undertakingýÿ has been defined as an industrial undertaking in which the aggregate value of the machinery or plant installed as on the last day of the previous year does not exceed Rs. 10 lakhs. In the Statement on Industrial Policy made in July 1980, Government announced its decision to increase the limit of investment in the case of the generality of small-scale industrial undertakings from Rs. 10 lakhs to Rs. 20 lakhs with effect from 1-8-1980, as a measure to boost the development of small-scale industries and to ensure their rapid growth.

Finance Act, 1981

8.3 In view of the aforesaid change in the definition of small-scale industrial undertaking, the Finance Act has made the following modifications in the relevant provisions as under:

1. Where any assessee has installed any machinery or plant in a small-scale industrial undertaking in a previous year ending after 31st July, 1980, he will be eligible for investment allowance at the specified rates if the total value of the machinery or plant installed in the industrial undertaking as on the last day of the previous year does not exceed Rs. 20 lakhs. In a case where the previous year ended after 31st July, 1980, and the value of the machinery or plant installed in the industrial undertaking as on the last day of the previous year does not exceed Rs. 20 lakhs, the assessee will be entitled to investment allowance irrespective of whether the machinery is installed before 1st August, 1980 or on or after that date.

2. In regard to the provision for partial exemption of profits and gains derived from a small-scale industrial undertaking in any rural area under section 80HHA, the Finance Act provides that where the previous year ends after 31st July, 1980, the industrial undertaking will be regarded as a small-scale industrial undertaking if the total value of the machinery or plant installed therein on the last day of the previous year does not exceed Rs. 20 lakhs. Another amendment made in this section is intended to secure that in a case where an industrial undertaking was not eligible for the tax concession for the reason that the investment in machinery or plant in earlier years exceeded Rs. 10 lakhs, such undertaking would be eligible for the benefit of this tax concession for the unexpired portion of the 10-year period specified in that section provided that the total investment in machinery or plant at the end of the relevant previous year does not exceed Rs. 20 lakhs. For example, where the industrial undertaking was not eligible for the initial 3 assessment years for the reason that the value of the machinery or plant installed in the said undertaking exceeded Rs. 10 lakhs, such an undertaking would be eligible for the tax concession under section 80HHA for the balance period of 7 assessment years commencing with the assessment year 1981-82 or any subsequent assessment year relevant to the previous year provided that the value of the machinery or plant installed therein as on the last day of the previous year concerned did not exceed Rs. 20 lakhs.

3. The amended definition of a small-scale industrial undertaking in section 80HHA will also apply for the purposes of the tax holiday provision in section 80-I.

Finance Act, 1981

8.4 These provisions have come into force with effect from 1-4-1981 and are accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Sections 5 and 10 of the Finance Act]

Finance Act, 1981

Liberalisation of the provision relating to development allowance – Section 33A

9.1 Under section 33A, an assessee carrying on the business of growing and manufacturing tea in India is entitled to a deduction, in the computation of his taxable profits, by way of development allowance with reference to the actual cost of planting tea bushes. The development allowance is granted at the rate of 50 per cent of the cost of planting tea bushes on any land which had previously been abandoned or which is newly brought under plantation. The deduction in respect of the development allowance is granted in two stages. The deduction is first allowed in computing the profits of the second previous year reckoned from the previous year in which the land was prepared for planting, with reference to the actual cost of planting up to that year. The deduction is next allowed in computing the profits of the fourth previous year reckoned from the previous year in which the land was prepared for planting. The quantum of development allowance to be allowed in the second stage is equal to the difference between (a) the amount of development allowance computed in respect of the actual cost of planting incurred during the four accounting years, and (b) the development allowance allowed at the first stage, i.e., in respect of the second accounting year.

Finance Act, 1981

9.2 The actual cost of planting comprises the cost of preparing the land; the cost of seeds, cutting and nurseries; the cost of planting and replanting; and the cost of upkeep thereof for the previous year in which the land has been prepared for planting and 3 succeeding previous years. However, where such cost exceeds Rs. 10,000 per hectare for land in the plains or Rs. 12,500 per hectare in respect of land situated in hilly areas, the excess amount is ignored for the purpose of calculating the amount of development allowance.

Finance Act, 1981

9.3 Having regard to the considerable increase in the cost of planting tea bushes, the Finance Act has raised the monetary ceiling limits of the cost of planting for the purposes of calculating the amount of development allowance in the following manner:

i.	for tea gardens situate in the plains	Rs. 30,000
ii.	for tea gardens situate in hilly areas other than Darjeeling district	Rs. 35,000
iii.	for tea gardens situate in hilly areas of the district of Darjeeling	Rs. 40,000

 

For this purpose, the district of Darjeeling means the district of Darjeeling as it existed on the 28th February, 1981, being the date on which the Finance Bill, 1981 was introduced in the Lok Sabha.

Finance Act, 1981

9.4 This provision will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Section 6 of the Finance Act]

Finance Act, 1981

Increase in the quantum of aggregate of the deductions in respect of profits transferred to special reserve in the case of approved financial corporations and public housing finance companies – Section 36(1)(viii)

10.1 Under section 36(1)(viii), approved financial corporations engaged in providing long-term finance for industrial or agricultural development in India and approved public companies engaged in carrying on the business of providing long-term finance for construction or purchase of houses in India for residential purposes, are entitled to a deduction in the computation of their taxable profits, in respect of the amount transferred by them out of such profits to a special reserve account, up to 40 per cent of their total income computed before making any deduction under Chapter VIA of the Act. The aggregate of the deductions on this account over a period of years cannot, however, exceed the amount of the paid-up capital.

Finance Act, 1981

10.2 The approved financial corporations and public housing finance companies are engaged in the promotion of important socio-economic objectives. With a view to enabling such corporations and companies to extend the scale of their operations, the Finance Act has increased the quantum of the ceiling of the aggregate of the deductions over a period of years from 100 per cent of the paid-up capital to 200 per cent of such paid-up capital.

Finance Act, 1981

10.3 This provision will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Section 7 of the Finance Act]

Finance Act, 1981

Tax concession to foreign companies engaged in prospecting for, or extraction or production of, mineral oils or natural gas in India – Section 42 and new section 293A

11.1 Section 42 provides the machinery for securing flexible deductions in respect of expenses and allowances, etc., admissible in determining the profits and gains of any business consisting of the prospecting for, or extraction or production of, mineral oils. The provision of this section can be invoked only where the Central Government has entered into an agreement with the person concerned for prospecting for, or extraction or production of, mineral oils and the Central Government is a participant in such business. Section 42 further provides that the agreement between the Central Government and the person concerned may make provisions in relation to the expenditure by way of infructuous or abortive exploration or expenditure incurred on drilling or exploration activities and depletion allowance and where such provisions are made, the expenditure or allowance shall be computed in accordance with the agreement and not in accordance with the general provisions of the Income-tax Act.

Finance Act, 1981

11.2 The Finance Act has made the following amendments in section 42, namely:

1. Since it is likely that the Central Government may not directly participate in the business consisting of prospecting for, or extraction or production of, mineral oils but may carry out such operations through its nominee, such as, a public sector undertaking, it has been provided that the participation in such business can be of such nominee as well.

2. Under the existing provision, the agreement between the Central Government and the person concerned may make provision in relation to the allowance of the specified categories of expenditure but not in respect of depreciation allowance. Such an agreement cannot, therefore, provide for a differential basis for the computation of the depreciation allowance. This provision has been amended to provide that deductions permitted under the agreement may cover depreciation allowance as well.

Finance Act, 1981

11.3 The Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (ýÿTerritorial Waters Actýÿ) specifies that the Exclusive Economic Zone of India is an area adjacent to the territorial waters and the limit of the zone is 200 nautical miles from the base line. In this Exclusive Economic Zone, the Central Government has sovereign rights for the purpose of exploration, exploitation, conservation and management of natural resources. Under section 7(7) of the Territorial Waters Act, the Central Government is empowered to issue a notification in the Official Gazette to extend, with such restrictions and modifications as it thinks fit, any enactment for the time being in force in India or any part thereof to the Exclusive Economic Zone or any part thereof and make such provisions as it may consider necessary for facilitating the enforcement of such enactment. Where any such enactment is so extended, it will have the effect as if the said zone or any part thereof to which it has been so extended were a part of the territory of India. It is proposed to issue a notification in terms of the Territorial Waters, Act, to extend the direct tax enactments to the Exclusive Economic Zone.

Finance Act, 1981

11.4 Under the existing provisions, the income of a non-resident accruing or arising or received in India is alone chargeable to income-tax. After the Income-tax Act is extended to the Exclusive Economic Zone, the income accruing or arising or received by a non-resident in such zone would also be chargeable to income-tax. At present, our country is seeking participa-tion of foreign companies in the field of oil exploration and production and the Government is examining the question of entering into agreements with such companies on a participation basis. With a view to encouraging the foreign companies to participate in the business of oil exploration and production, the Central Government has taken powers to relax and modify the provisions of the Income-tax Act. For this purpose, a new section 293A has been inserted in the Income-tax Act, to enable the Central Government to make, by a notification in the Official Gazette, an exemption, reduction in rate or other modification in respect of income-tax in favour of any class of persons specified below, if it considers it necessary or expedient so to do in the public interest, namely:

1. Persons with whom the Central Government has entered into agreements for the association or participation of that Government or any person authorised by that Government in any business consisting of prospecting for, or extraction or production of, mineral oils.

2. Persons providing any services or facilities in connection with any business consisting of the prospecting for, or extraction or production of, mineral oils carried on by that Government or any person notified by it in this behalf, or those supplying any ship, aircraft, machinery or plant in connection with such business, whether by way of sale or by hire.

3. Employees of the persons referred to in (1) and (2) above.

Any notification issued by the Central Government in pursuance of this provision will be required to be laid before each House of Parliament. For the purpose of section 42 and section 293A mineral oils will also include petroleum and natural gas.

Finance Act, 1981

11.5 These provisions have come into force with effect from 1-4-1981.

[Sections 8 and 22 of the Finance Act]

Finance Act, 1981

Increase in the quantum of deduction in respect of medical expenses on handicapped dependants – Section 80D

12.1 Under section 80D, resident individuals and Hindu undivided families incurring expenditure on the medical treatment (including nursing) of a handicapped dependant are entitled to a specified deduction in respect of such expenditure in the computation of their total income. The handicapped dependant for this purpose means a relative of the individual, being the husband, wife, brother, sister or any lineal ascendant or descendant of that individual, or a member of the Hindu undivided family who is not dependent on any person other than such individual or Hindu undivided family for his support or maintenance. The handicapped dependant should be suffering from a physical or mental disability which is certified by a registered medical practitioner to have the effect of reducing considerably such personýÿs capacity for normal work or engaging in a gainful employment. The deduction to be allowed is of a specified amount, even though the expenditure actually incurred by the assessee for the medical treatment of the handicapped dependant is less than that amount or exceeds it. The specified amount of the deduction is (a) Rs. 2,400 in a case where the handicapped dependant has been admitted for not less than 182 days during the previous year in a hospital, nursing home, medical institution or any other institution notified by the Central Government to be an institution for the care of handicapped persons and fees or charges are payable to such hospital, nursing home or institution, and (b) Rs. 600, in any other case. In either case, the amount of the deduction is required to be reduced by the income, if any of the handicapped dependant during the relevant previous year. Further, the deduction under this section is allowed in respect of only one handicapped dependant even though the assessee may have incurred expenditure on the medical treatment of more than one handicapped dependant.

Finance Act, 1981

12.2 The Finance Act has made the following changes in the provisions of section 80D, namely:

1. In view of the considerable increase in the cost of medical expenses, the quantum of deduction has been raised from the existing level of Rs. 2,400 to Rs. 4,800 and from Rs. 600 to Rs. 1,200.

2. The existing provision requiring the reduction of the amount of the deduction by the income of the handicapped dependant during the relevant previous year has been omitted.

3. The provision limiting the deduction in respect of any one chosen handicapped dependant has been omitted. In other words, the assessee would be eligible to obtain a deduction of the specified amount in respect of every one of his handicapped dependants.

Finance Act, 1981

12.3 These provisions will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Section 9 of the Finance Act]

Finance Act, 1981

Inclusion of certain segments of the electronic industry in the Ninth Schedule to the Income-tax Act – Section 80M and the Ninth Schedule

13.1 The Ninth Schedule to the Income-tax Act contains a list of priority industries which are at present entitled to the following tax concessions, namely:

1. Under section 80M, full deduction is granted in respect of income by way of dividends received by a domestic company from an Indian company formed and registered under the Companies Act, 1956 after 28th February, 1975 and engaged exclusively or almost exclusively in the manufacture or production of any one or more of the following articles or things specified in the Ninth Schedule, namely:

1. Non-ferrous metals.

2. Ferro-alloys and special steels.

3. Steel castings and forgings.

4. Electric motors.

5. Industrial and agricultural machinery.

6. Earth-moving machinery.

7. Machine tools.

8. Fertilizers, namely, ammonium sulphate, ammonium sulphate nitrate (double salt), ammonium nitrate, calcium ammonium nitrate (nitrolime stone), ammonium chloride, superphosphate, urea and complex fertilizers of synthetic origin containing both nitrogen and phosphorus, such as, ammonium phosphates, ammonium sulphate phosphate and ammonium nitrophosphate.

9. Soda ash.

10. Caustic soda.

11. Commercial vehicles.

12. Ships.

13. Tyres and tubes.

14. Paper, pulp and newsprint.

15. Cement.

16. Pesticides.

17. Inorganic heavy chemicals (other than soda ash and caustic soda mentioned in items 9 and 10 respectively).

18. Organic heavy chemicals.

19. Industrial explosives.

2. Under section 5(1)(xxa) of the Wealth-tax Act, an assessee is entitled to exemption from wealth-tax in respect of the value of the equity shares in companies established with the main object of carrying on the business of construction, manufacture or production of any one or more articles or things specified in the list in the Ninth Schedule to the Income-tax Act without any ceiling limit for five initial assessment years.

Finance Act, 1981

13.2 In recent years, the electronics industry has assumed importance from the point of view of generation of additional employment and stepping up of our exports. In order to give a further fillip to this industry the Finance Act has included the following segments of the electronics industry as Item No. 33 in the Ninth Schedule, namely :

Electronic components and raw material computers; and peripherals; communication equipment; process control, instrumentation, industrial and professional grade electronic equipment.

Finance Act, 1981

13.3 The Finance Act has also amended clause (a) of sub-section (1) of section 80M relating to deduction in respect of certain inter-corporate dividends to include the new Item No. 33 therein with the result that dividends received by domestic companies from Indian companies manufacturing the specified electronic components referred to in the preceding paragraph would be fully deductible in computing the total income of such companies. Another result of the inclusion of the specified electronic components industry in the Ninth Schedule would be that individuals and Hindu undivided families would be entitled to complete exemption from wealth-tax in respect of the value of equity shares of companies manufacturing the specified electronic components for five initial assessment years without any ceiling limit.

Finance Act, 1981

13.4 These provisions will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Sections 11 and 23 of the Finance Act]

Finance Act, 1981

Extension of the tax concessions to the book publishing industry – Section 80QQ

14.1 Under section 80QQ, any person carrying on a business in India of the printing and publication of books, or publication of books without the activity of printing, is entitled to a deduction, in the computation of his taxable income, of an amount equal to 20 per cent of the profits and gains of such business. This deduction was admissible up to and including assessment year 1980-81. The deduction under this section is not admissible to an assessee who carries on the business of printing of books, unless the books so printed are also published by him. For the purposes of this section, the expression books does not include newspapers, journals, magazines, diaries, brochures, pamphlets and other publications of a similar nature.

Finance Act, 1981

14.2 With a view to providing continued encouragement to the book publishing industry in India, the Finance Act has extended the benefit of this tax concession for a further period of five assessment years beginning with assessment year 1981-82 and ending with assessment year 1985-86.

Finance Act, 1981

14.3 This provision has come into force with effect from 1-4-1981.

[Section 12 of the Finance Act]

Finance Act, 1981

Provisions to counteract tax avoidance through the medium of multiple associations of persons without share specifications – Section 86 and new section 167A

15.1 Under section 4, income-tax is chargeable for an assessment year at the rate or rates specified in the annual Finance Act in respect of the total income of the previous year of every person. The expression ýÿpersonýÿ has been defined in section 2(31) to include, inter alia, an association of persons. The expression ýÿassociation of personsýÿ has not been defined in the Income-tax Act. However, the Supreme Court has observed in one case that for forming an association of persons, the members must join together for the purpose of producing any income. An association of persons could be formed only if two or more persons voluntarily combined together for a certain purpose. Hence, volition on the part of members is an essential ingredient of an association of persons.

Finance Act, 1981

15.2 Under the existing provisions, the income of an association of persons is charged to income-tax as the income of a separate assessable entity at the rates specified in the annual Finance Act applicable to an individual. Further, in the case of a member of an association of persons, no tax is payable on any portion of the amount which such member is entitled to receive from the association of persons on which income-tax has already been paid by the association. Such portion is, however, taken into account for determining the rate of income-tax applicable in the case of such member. In other words, the share of income from the association of persons is included in the assessment of such members for rate purposes only.

Finance Act, 1981

15.3 It has been found that the existing provisions relating to the assessment of the association of persons have been misused by certain persons by forming association of persons without specifying the shares of members constituting it. The modus operandi in such cases is that an assessee with a high income creates a large number of associations of persons, with each of them declaring a small part of what in reality is the income of the assessee. Under this device, no part of the income of the association of persons is liable to be included in the assessment of its members even for the rate purposes since the shares of the members are left unspecified and care is taken to ensure that the members do not receive any income during the life of the association of persons. Accordingly, income-tax is payable only by the association of persons on its income which may or may not be liable to tax since it is, in the generality of cases, below the exemption limit. The net result of this arrangement is that the assessee who is in fact entitled to receive such income and who diverts such income to the association of persons as a whole pays only a very small fraction of the tax that is due from him.

Finance Act, 1981

15.4 In order to counteract such attempts at tax avoidance through the creation of multiple associations of persons without defining the shares of the members, the Finance Act has inserted a new section 167A to provide that where the share of the members of an association of persons (not being a company or a co-operative society) in the income of such association are indeterminate or unknown, tax shall be charged on the total income of such association at the maximum marginal rate. For this purpose, the expression ýÿmaximum marginal rateýÿ means the rate of income-tax (including surcharge on income-tax, if any) applicable in relation to the highest slab of income in the case of an association of persons as specified in the Finance Act of the relevant year. Sub-section (2) of section 167A provides that where the individual shares of the members of such association of persons in any part of the income of such association are indeterminate or unknown, the income-tax payable by the association shall be the aggregate ofýÿ

(i) the amount of income-tax calculated on the part of such total income in which the shares of the members are indeterminate or unknown, at the maximum marginal rate; and

(ii) in relation to the balance amount of its total income in which the shares of the members are indeterminate or unknown, the amount of income-tax with which the association would have been chargeable on such remaining part of the total income if it were its total income.

For this purpose, it has been laid down that the share of the members in the income shall be regarded as indeterminate or unknown if such shares are not ascertainable on the date of the formation of the association or at any time thereafter.

Finance Act, 1981

15.5 The Finance Act has also amended section 86 by inserting an Explanation in clause (v) of section 86 to provide that in the case of an association of persons which is assessable under section 167A, each of the members of the association whose share in the income or part of the income of such association is indeterminate or unknown will, for the purposes of determining the rate of income-tax applicable on the income of the member of the association, be deemed to be entitled to receive an equal share in the total income or part of such total income of the association and the individual share of such members in the total income or part of the total income of the association will be determined accordingly.

Finance Act, 1981

15.6 The effect of the aforesaid provisions will be as follows:

1. Where the shares of members of an association of persons in the whole of its income are indeterminate or unknown, the association will be chargeable to income-tax at the maximum marginal rate on its entire income. Further, for the purposes of determining the rate of income-tax to be applied to the income of a member of such association, every member will be deemed to be entitled to receive an equal share in the total income of the association and the amount of income so determined will be included in his assessment for rate purposes.

2. Where the shares of members of an association of persons in which only a part of its income are indeterminate or unknown, the association will be chargeable to income-tax at the maximum marginal rate in respect of such part while the balance of its income in which the shares of the members are specific, will be chargeable at the normal rates. Further, for the purpose of determining the rate of income-tax to be applied to the income of a member of such association, every member will be deemed to be entitled to receive an equal share in that part of the total income of the association in which the shares of the members are indeterminate or unknown and the amount of the share so determined, as increased by the share of the member in that part of the income of the association in which the shares of members are specified, will be included in the assessment of the member for rate purposes.

Finance Act, 1981

15.7 These provisions have come into force with effect from 1-4-1981 and are accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Sections 13 and 16 of the Finance Act]

Finance Act, 1981

Provision to counteract tax avoidance through creation of oral trusts – Section 160 and new section 164A

16.1 Under section 160, the expression ýÿrepresentative assesseeýÿ includes a trustee appointed under a trust declared by a duly executed instrument in writing, whether testamentary or otherwise (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913).

Hitherto, a trustee appointed under a trust declared orally was not covered by this provision since he could not be said to have been appointed under a trust declared by a duly executed instrument in writing. The fact that the terms of such a trust were subsequently reduced to writing did not also alter this position. As a result, the provisions contained in sections 160 to 167 relating to representative assessees were not applicable in the case of oral trusts and accordingly the income of such a trust was chargeable to income-tax as a separate entity at the normal rates applicable under the annual Finance Acts. It follows that in the case of a discretionary trust created orally, the provisions of section 164 relating to the charge of tax on the income of such trust at the maximum marginal rate were also not applicable. With a view to counteracting attempts at tax avoidance through the creation of oral trusts, the Finance Act, has, in the first instance inserted a new clause (v) in sub-section (1) of section 160 to provide that a trustee appointed under an oral trust would be a ýÿrepresentative assesseeýÿ in respect of the income which he receives or is entitled to receive on behalf of or for the benefit of any person. The Finance Act has also inserted a new Explanation for the purposes of clause (iv) of section 160(1). Under the Explanation, a trust which is not declared by a duly executed instrument in writing (including a wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) will be deemed to be a trust declared by a duly executed instrument in writing if a statement in writing signed by the trustee or trustees and setting out the purpose or purposes of the trust, particulars of the trustee or trustees, the beneficiary or beneficiaries and the trust property is prepared and forwarded to the Income-tax Officer within the specified time limit. Where the trust has been declared before 1st June, 1981, the specified time limit will be 1st September, 1981 and in any other case, three months from the date of the declaration of the trust. For the purposes of clause (v) of section 160(1), the expression ýÿoral trustýÿ means a trust which is not declared by a duly executed instrument in writing (including any wakf deed which is valid under the Mussalman Wakf Validating Act, 1913) and which is also not deemed under the new Explanation 1 to be a trust declared by a duly executed instrument in writing.

Finance Act, 1981

16.2 The Finance Act has also inserted a new section 164A to provide for the charge of tax in case of an oral trust. Under the new section 164A, any income which a trustee receives or is entitled to receive on behalf of or for the benefit of any person under an oral trust will be chargeable to income-tax at the maximum marginal rate. For this purpose, the expression ýÿmaximum marginal rateýÿ has the same meaning as in the Explanation 2 below section 164(3). Accordingly, the ýÿmaximum marginal rateýÿ means the rate of income-tax (including surcharge on income-tax) applicable in relation to the highest slab of income in case of an association of persons as specified in the Finance Act of the relevant year.

Finance Act, 1981

16.3 The effect of the above provisions will be as follows:

i. an oral trust, the terms whereof are not subsequently recorded in writing and intimated to the Income-tax Officer in the specified manner, will be chargeable to income-tax at the maximum marginal rate in all cases; and

ii. an oral trust, the terms whereof are subsequently recorded in writing and intimated to the Income-tax Officer in the specified manner, will be chargeable to income-tax at the maximum marginal rate in cases where the shares of the beneficiaries are indeterminate and unknown. Where, however, such shares are known, the tax will be levied and recovered from the trustees in the same manner and to the same extent as would be leviable or recoverable from the beneficiaries.

Finance Act, 1981

16.4 These provisions have come into force with effect from 1-4-1981 and are accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Sections 14 and 15 of the Finance Act]

Finance Act, 1981

Raising of threshold for payment of advance tax in certain cases – Section 208

17.1 Income-tax is required to be paid in advance during every financial year in three equal instalments by specified dates on the assesseeýÿs current income (other than capital gains or income by way of winnings from lotteries, winnings from horse races, etc.) liable to tax for the assessment year next following the said financial year. Advance tax is payable only where the income of the assessee subject to advance tax exceeds the specified limit. The monetary limit specified in this behalf in the case of an assessee other than a company, a local authority and a registered firm was Rs. 12,000. The Finance Act has raised the exemption limit in the case of individuals, Hindu undivided families (other than those with one or more members having independent total income exceeding the exemption limit), associations of persons, unregistered firms, etc., from Rs. 12,000 to Rs. 15,000. In respect of such categories of assessees, the monetary limit specified for the purpose of payment of advance tax has been raised from Rs. 12,000 to Rs. 15,000 to coincide with the exemption limit in their case. However, it should be noted that in the case of Hindu undivided families having one or more members with independent total income exceeding the exemption limit, the limit specified in this behalf has been retained at the existing level of Rs. 12,000 only.

Finance Act, 1981

17.2 These provisions have come into force with effect from 1-6-1981.

[Section 17 of the Finance Act]

Finance Act, 1981

Amendment of the provisions relating to qualifications of the Members of the Appellate Tribunal and related matters – Sections 252, 253, 256 and 269C

18.1 Under the Income-tax Act, an appeal from an order passed by an Income-tax Officer lies to the Appellate Assistant Commissioner, and in certain cases to the Commissioner of Income-tax (Appeals). Appeals from orders passed by or with the approval of the Inspecting Assistant Commissioner lie to the Commissioner of Income-tax (Appeals). The second appeal from an order of the Appellate Assistant Commissioner or the Commissioner (Appeals) lies to the Income-tax Appellate Tribunal. Appeals from certain orders passed by the Commissioner of Income-tax also lie to the Income-tax Appellate Tribunal. Other direct tax enactments contain practically identical provisions in regard to appeals which can be filed to the Appellate Tribunal.

Finance Act, 1981

18.2 At present, the Central Government is empowered to constitute an Appellate Tribunal consisting of as many Judicial and Accountant Members as it thinks fit to exercise the powers and discharge the functions conferred on the Appellate Tribunal by the Income-tax Act. The qualifications for being appointed as a Judicial Member or an Accountant Member in the Appellate Tribunal are as under :

a. Judicial Member :

(i) the person should have held a civil judicial post for at least 10 years,

(ii) the person should be a member of the Central Legal Service (not below Gr. III) for at least 3 years, or

(iii) he should have been in practice as an advocate for at least 10 years.

b. Accountant Member :

(i) the person should have been in practice for at least 10 years as a chartered accountant or as a registered accountant or partly as a chartered accountant and partly as a registered accountant, or

(ii) he should have served as an Assistant Commissioner of Income-tax for at least 3 years.

Finance Act, 1981

18.3 The Finance Act has made the following modifications in the qualifications for appointment as Judicial and Accountant Members of the Income-tax Appellate Tribunal, namely:

1. A person who has been a member of the Central Legal Service and has held a post in Grade I of that service or any equivalent or higher post for at least 3 years will qualify for appointment as a Judicial Member of the Income-tax Appellate Tribunal. Hitherto, a member of the Central Legal Service qualifies for such appointment if he had held a post not below Grade III for at least 3 years.

2. The qualifications for appointment as a Judicial Member of the Appellate Tribunal have been brought on a par with the qualifications for appointment as a Judge of the High Court in the case of persons holding a judicial office or practising as an advocate. Accordingly, a person shall qualify for appointment as a Judicial Member of the Income-tax Appellate Tribunal, ifýÿ

a. he has for at least 10 years held a judicial office in the territory of India;

b. he has been in practice as an advocate for at least 10 years.

For the purpose, in computing the period during which a person has held judicial office in the territory of India, there shall be included any period during which the person has been an advocate or has held the office of a member of a Tribunal or any post under the Union or a State requiring special knowledge of law. Further, in computing the period during which a person has been an advocate, there shall be included any period during which a person has held judicial office or the office of a member of a Tribunal or any other post under the Union or State, requiring special knowledge of law after he becomes an advocate.

3. A person belonging to the Indian Income-tax Service, Group A, who has held the post of Commissioner of Income-tax, or any other equivalent or higher post for at least 3 years will qualify for appointment as an Accountant Member.

Finance Act, 1981

18.4 Under the provisions relating to the proposed Customs Tribunal, the fee for filing of an appeal to the Tribunal, except in the case of a departmental appeal will be Rs. 200. Under the Income-tax Act, such fee had been fixed at Rs. 125 only. The Finance Act has raised the fee for appeal before the Income-tax Appellate Tribunal to the level prescribed under the proposed Customs Tribunal. The fee for filing reference application to the High Court is also increased from Rs. 125 to Rs. 200, as provided in relation to the proposed Customs Tribunal.

Finance Act, 1981

18.5 The provisions relating to raising of the fee for appeal to the Tribunal and for filing reference application to the High Court have taken effect from 1-6-1981. Accordingly, in a case where the assessment proceedings were initiated after 31-3-1971 but before 1-6-1981, the fee payable would be Rs. 125, whereas in a case where the assessment proceedings were initiated after 31-5-1981, the enhanced fee of Rs. 200 will become payable. For this purpose, the assessment proceedings shall be deemed to have been initiated on the date on which the assessee was served with a notice calling upon him to file the return of income or the date on which the assessee has filed the return of income voluntarily, whichever is earlier. Thus, where the dispute relates to the assessment to question whether the existing fee of Rs. 125 or the enhanced fee of Rs. 200 would be payable by the assessee will depend upon the date on which the assessment proceedings are deemed to have commenced.

[Sections 18, 19, 20 and 21 of the Finance Act]

Finance Act, 1981

Amendment of the Eleventh Schedule

19.1 The Eleventh Schedule contains a list of articles or things of low priority for certain specified purposes and has relevance for the following provisions of the Income-tax Act, namely:

1. Under section 32A, an assessee who has installed new machinery or plant for the purposes of the business of manufacture, production or construction of any article or thing, other than an article or thing of low priority specified in the Eleventh Schedule, is entitled to an investment allowance at the rate of 25 per cent of the actual cost of such machinery or plant, in the computation of his taxable profits.

2. Under section 80CC, an individual, a Hindu undivided family or an association of persons consisting of married couples governed by the system of community of property in the Union territories of Goa, Daman and Diu and Dadra and Nagar Haveli is entitled to a deduction, in the computation of the taxable income, in respect of the cost of shares of, inter alia, certain industrial companies, other than those engaged in the manufacture of any article or thing of low priority specified in the Eleventh Schedule, subject to certain conditions.

3. Under section 80-I, an assessee who derives any profits and gains from a newly established industrial undertaking is entitled to a deduction, in the computation of the taxable income, of a specified percentage of such profits and gains, subject to certain conditions. One of the conditions laid down in this behalf is that such industrial undertaking should not be engaged in the manufacture or production of any article or thing specified in the list in the Eleventh Schedule.

A small-scale industrial undertaking is, however, entitled to the tax concessions referred to in (1) and (3) above even though it may be engaged in the manufacture or production of any article or thing of low priority.

Finance Act, 1981

19.2 There appeared to be little justification for treating some of the listed industries as of low priority. On a review the Finance Act has amended the Eleventh Schedule so as to exclude therefrom the following articles or things, namely:

8. Broadcasting television receiver sets; radio (including transistor sets); radiograms and tape recorders (including cassette recorders and tape decks).

11. Electric fans.

12. Domestic electrical appliances, not falling under any other item in this list.

Explanation: ýÿDomestic electrical appliancesýÿ means electrical appliances normally used in the household and similar appliances used in places, such as, hotels, restaurants, hostels, offices, educational institutions and hospitals.

13. Household furniture, utensils, crockery and cutlery not falling under any other item in this list.

14. Pressure cookers.

15. Vacuum flasks and other vacuum vessels.

16. Tableware and sanitaryware.

17. Glass and glassware.

18. Chinaware and porcelainware.

19. Mosaic tiles and glazed tiles.

20. Organic surface active agents, surface active preparations and washing preparations whether or not containing soap.

21. Synthetic detergents.

26. Pigments, colours, paints, enamels, varnishes, blacks and cellulose lacquers.

29. Amplifiers or any other apparatus used for addressing the public.

Finance Act, 1981

19.3 This provision will take effect from 1-4-1982 and will, accordingly, apply in relation to the assessment year 1982-83 and subsequent years.

[Section 24 of the Finance Act]
4. Amendments to Wealth-tax Act

FINANCE  ACT, 1981

Measures to plug loopholes for tax avoidance through the medium of oral trusts – Section 21

20.1 Under section 21(1), a court of wards, administrator-general, an official trustee or any receiver or manager or any other person appointed under any order of a court to manage property on behalf of another or any trustee appointed under a trust declared by a duly executed instrument in writing is charged to wealth-tax in respect of any assets held by him, in the like manner and to the same extent as it would be leviable upon and recoverable from the person on whose behalf or  for whose benefit such assets are held.

FINANCE  ACT, 1981

20.2 Section 21(4) provides that in a case where the shares of the beneficiaries in the assets of the trust are indeterminate or unknown, the net wealth of such trust would be chargeable to wealth-tax in the like manner and to the same extent as it would be levied upon and recoverable from an individual who is a  citizen of India and is resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course would be more beneficial to the revenue.

FINANCE  ACT, 1981

20.3 The provisions of section 21(1) or  section 21(4) are not applicable to the assets held by a trustee or trustees under an oral trust whether or not the  terms of the trust are subsequently reduced to writing. This is because such a trust cannot be considered to be declared by a duly executed instrument in writing at the time when such trust was created. It has been found that several assessees have resorted to the device of creation of a large number of oral trusts with a view to, inter alia, avoiding the proper wealth-tax liability.

FINANCE  ACT, 1981

20.4 With a view to curbing tax avoidance through the medium of oral trusts, the Finance Act has made the following provisions, namely:

1. A new sub-section (4A) has been inserted in section 21 to provide that where the assets chargeable  to wealth-tax are held by a trustee under an oral trust, the wealth-tax shall be levied upon and recovered from such trustee in the like manner and to the same extent as it would be leviable  upon and recoverable from an individual who is a citizen of India and is resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course would be more beneficial to the revenue.

2. An oral trust will, however, be regarded as a trust declared by a duly executed instrument in writing, if a statement in writing signed by the trustee setting out the purpose of the trust, particulars as to the trustees, the beneficiaries and the trust property is forwarded to the Wealth-tax Officer within the specified time limit. The time limit specified in this behalf is a period of three months from 1-6-1981 where an oral trust has been created before that date and in any other case, a period of three months from the date of the declaration of the trust.

FINANCE  ACT, 1981

20.5 The net effect of these provisions will be as follows :

1. An oral trust the terms whereof have not subsequently been reduced to writing and intimated to the Wealth-tax Officer as specified above, will be chargeable to wealth-tax at the rates applicable to an individual who is a citizen of India and is a resident of India or at the rate of 3 per cent, whichever course is more beneficial to the revenue.

2. An oral trust, the terms whereof have been subsequently reduced to writing and intimated to the Wealth-tax Officer in the specified manner, will be chargeable to wealth-tax at the rates applicable to an individual citizen of India and resident of India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course is more beneficial to the revenue if the shares of the beneficiaries in the trust property are indeterminate or unknown. Where, however, the shares of the beneficiaries in the trust property are determinate or ascertainable, wealth-tax will be levied upon and recoverable from the trustees in the same manner and to the same extent as it will be leviable and recoverable from the beneficiaries.

FINANCE  ACT, 1981

20.6 These provisions are similar to the amendments made by the Finance Act in sections 160 and 164 of the Income-tax Act referred to in paragraphs 16.1 to 16.3.

FINANCE  ACT, 1981

20.7 These provisions have come into force with effect from 1-4-1981 and are accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Section 26 of the Finance Act]

FINANCE  ACT, 1981

Measures to plug loopholes for tax avoidance through the medium of associations of persons wherein the shares of the members are indeterminate or unknown – New section 21AA and section 41

21.1 Under the Wealth-tax Act, individuals and Hindu undivided families are taxable entities but an association of persons is not charged to wealth-tax on its net wealth. Where an individual  or a Hindu undivided family is a member of an association of persons, the value of the interest of such member in the association of persons is determined in accordance with the provisions of the rules and is includible in the net wealth of the member.

FINANCE  ACT, 1981

21.2 Instances had come to the notice of the Government where certain assessees had resorted to the creation of a large number of associations of persons without specifically defining the shares of the members therein with a view to avoiding proper tax liability. Under the existing provisions, only the value of the interest of the member in the association which is ascertainable is includible in his net wealth. Accordingly, to the extent the value of the interest of the member in the association cannot be ascertained or is unknown, no wealth-tax is payable by such member in respect thereof.

FINANCE  ACT, 1981

21.3 In order to counter such attempts at tax avoidance through the medium of multiple associations of persons without defining the shares of the  members, the Finance Act has inserted a new section 21AA in the Wealth-tax Act to provide for assessment in the case of associations of persons which do  not define the shares of the members in the assets thereof. Sub-section (1) of new section 21AA provides that where assets chargeable to wealth-tax are held by an association of persons (other than a company or a co-operative society) and the individual shares of the members of the said association in income or the assets of the association on the date of its formation or at any time thereafter, are indeterminate or unknown, wealth-tax will be levied upon and recovered from such association in the like manner and to the same extent as it is leviable upon and recoverable from an individual who is a citizen of India and is resident in India at the rates specified in Part I of Schedule I or at the rate of 3 per cent, whichever course is more beneficial to the revenue.

FINANCE  ACT, 1981

21.4 Sub-section (2) of new section 21AA provides that where any  business or profession carried on by such an association has been discontinued or where it is dissolved, the Wealth-tax Officer is empowered to make an assessment of the net wealth of such association as if no discontinuance or dissolution had taken place and the other provisions of the Wealth-tax Act relating to the levy of penalty or any sum chargeable under the said Act would, with necessary modifications, apply to such assessment.

FINANCE  ACT, 1981

21.5  Sub-section (3) of section 21AA empowers the Wealth-tax Officer or the Appellate Assistant Commissioner or the Commissioner (Appeals) to levy a penalty on an association of persons, referred to in sub-section (1) for any of the defaults referred to in section 18 or under section 18A of the Wealth-tax Act, even after the association has  discontinued its business or has been dissolved.

FINANCE  ACT, 1981

21.6  Sub-section (4) of new section 21AA provides that every person, who at the time of such discontinuance or dissolution was a member of the association of persons and a legal representative of such person who is deceased, will be jointly and severally liable for the amount of tax penalty or any other sum payable by such association and the other provisions of the Wealth-tax Act will also apply in relation to such assessment or the imposition of penalty or other sum.

FINANCE  ACT, 1981

21.7 Sub-section (5) of new section 21AA provides that where any discontinuance or dissolution takes place after any proceedings in relation to any assessment year have commenced, such proceedings may be continued against the persons referred to in sub-section (4) from the stage at which these proceedings stood at the time of such discontinuance or dissolution and the provisions of the Wealth-tax Act shall apply accordingly.

FINANCE  ACT, 1981

21.8 The Explanation to new section 21AA specifically provides that in computing the net wealth of the association, certain exemptions  specified in clauses (xv), (xvi), (xxii ), (xxiii), (xxiv ), (xxv), (xxvi), (xxvii ), (xxviii) and (xxix) of sub-section  (1) of section 5 will not be taken into consideration. In other words, in computing the net wealth of the association of persons, the provisions regarding the exclusion of the assets provided in the aforesaid clauses will not apply.

FINANCE  ACT, 1981

21.9 Section 31 of the Finance Act has inserted a new sub-section (4) in section 41 relating to service of notice to provide that notices under the Wealth-tax Act in respect of any matter relating to the association which has been dissolved may  be served on any person who was a member of such association immediately before its dissolution.

FINANCE  ACT, 1981

21.10 These provisions have come into force with effect from 1-4-1981 and are accordingly applicable in relation to the assessment year 1981-82 and subsequent years.

[Sections 27 and 31 of the Finance Act]

JUDICIAL ANALYSIS

EXPLAINED IN – In CWT  v. Mulam Club [1991] 191 ITR 370 (Ker.) the alove Circular was explained with the following observations :

“. . . That circular explains the measures to plug loopholes for tax avoidance through the medium of associations of persons wherein shares of the members are indeterminate or unknown. The section was amended by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989, and by the Finance Act of 1989. Section 21AA is thus in operation from the assessment year 1981-82, but it is not applicable up to and inclusive of the assessment year 1980-81. . . .” (p. 379)

FINANCE  ACT, 1981

Enhancement of fees in respect of appeals to the Appellate Tribunal or reference application to the High Court – Sections 24, 26 and 27

22.1 Under section 24(4) and section 26(2) of the Wealth-tax Act, a fee of Rs. 125 is payable by an assessee in respect of the appeals to the Appellate Tribunal. Similarly, under section 27(1) a fee of Rs. 125 is payable by an assessee in respect of a reference application to the High Court. The Finance Act has enhanced the fee payable in this behalf from Rs. 125 to Rs. 200. Where the assessment proceedings were initiated after 31-3-1971 but before 1-6-1981, the existing fee of Rs. 125 will be payable by the assessee. Where, however, the assessment proceedings are initiated after 31-5-1981, the enhanced fee of Rs. 200 will be payable. For this purpose, the assessment proceedings will be deemed to have been initiated on the date on which the assessee was served with a notice calling upon him to file the return of net wealth for the relevant assessment year or the date on which the return of net wealth was furnished voluntarily by the assessee, whichever is earlier. Thus, where the dispute relates to the assessment, the question whether the existing fee of Rs. 125 or the enhanced fee of Rs. 200 will be payable will depend upon the date on which the assessment proceedings are deemed to have been commenced.

FINANCE  ACT, 1981

22.2 This amendment is similar to the amendment made in sections 253 and 256 of the Income-tax Act referred to in paragraphs 18.4 and 18.5.

FINANCE  ACT, 1981

22.3 These provisions have come into force with effect from 1-6-1981.

[Sections 28 to 30 of the Finance Act]

6. Amendments to Companies (Profits) Surtax Act

Finance Act, 1981

Insertion of provisions relating to payment of advance surtax – New sections 7A to 7D and 9A

24.1 The Companies (Profits) Surtax Act provides for the levy of surtax on the chargeable profits of companies in excess of the statutory deduction. For this purpose, the chargeable profits is broadly defined to mean the total income as determined for the purposes of the Income-tax Act (subject to certain deductions) as reduced by the tax payable thereon. The statutory deduction is Rs. 2 lakhs or 15 per cent of the capital of the company, whichever is higher. The capital of the company for the purposes of surtax means the aggregate of (i) paid-up share capital ; (ii) development rebate and investment allowance reserve; and (iii) other reserves excluding such amounts credited thereto as have been allowed as deduction in computing the taxable income.

Finance Act, 1981

24.2 Although both income-tax and surtax are payable by companies, unlike income-tax, so far surtax was not payable in advance during the financial year immediately preceding the relevant assessment year. The Finance Act has made specific provisions for the payment of surtax in advance. These provisions are broadly on the lines of the corresponding provisions in the Income-tax Act relating to payment of advance tax by companies.

Finance Act, 1981

24.3 The Finance Act has inserted a new section 7A relating to advance payment of surtax. For this purpose, the expression ýÿchargeable amountýÿ, in relation to any previous year, means so much of the chargeable profits of the company of the previous year as exceed the statutory deduction. Further, the expression ýÿcurrent chargeable amountýÿ in relation to advance surtax payable by a company during any financial year means the chargeable amount of the company of the previous year relevant to the assessment year immediately following the said financial year.

Finance Act, 1981

24.4 Sub-section (2) of new section 7A provides that surtax will be payable in advance during every financial year in respect of the companiesýÿ current chargeable amount liable to tax for the assessment year next following the financial year. Sub-section (3) of section 7A provides that the advance surtax will be computed by adopting the chargeable amount of the latest previous year in respect of which regular assessment has been finalised or where the chargeable amount of a later previous year on the basis of which a provisional assessment has been made under section 7 exceeds the chargeable amount as determined in a regular assessment for an earlier assessment year, the chargeable amount as adopted for the provisional assessment shall be the basis for the payment of advance surtax. The amount of surtax will be calculated on the chargeable amount at the rates specified in the Third Schedule to the Act.

Finance Act, 1981

24.5 Sub-section (4) of new section 7A provides that surtax shall be paid in the financial year in three equal instalments on the specified dates. The dates specified in this behalf are :

i. 15th June, 15th September and 15th December in a case where at least 75 per cent of the chargeable amount is derived from a source or sources for which the previous year relevant to the assessment year ends on or before 31st December of the said financial year ; and

ii. 15th September, 15th December and 15th March, in any other case.

However, it has been provided that where in respect of any class of assessees, the Board has, under the proviso to section 211(1) of the Income-tax Act, authorised the payment of the last instalment of advance tax on 15th March instead of 15th December of the financial year, in such cases, the last instalment of advance surtax shall also be payable on 15th March instead of 15th December.

Finance Act, 1981

24.6 Sub-section (5) of new section 7A provides that every company will be required to furnish a statement of advance surtax on or before the date on which the first instalment is payable by it and where it has not been regularly assessed hithertofore such a company will be required to furnish an estimate of its current chargeable amount and the advance surtax payable thereon before the last instalment of advance surtax is due in its case. A company, which has been assessed by way of regular assessment and has furnished the statement within the specified time limit, will be required to pay the advance surtax in three equal instalments. A company which has not been previously assessed by way of regular assessment will be required to pay the advance surtax in accordance with the estimate furnished by it on such of the dates applicable in its case as have not expired or in one lump sum if only the last of such dates has not expired.

Finance Act, 1981

24.7 Sub-section (6) of section 7A provides that where a company which has already been assessed by way of regular assessment and is required to furnish a statement of advance surtax, estimates on or before the date on which the first instalment of advance surtax is payable in its case that the current chargeable amount is likely to be less than the chargeable amount on which advance surtax is payable by it in accordance with its statement, or for any other reason, the amount of advance surtax payable by it would be less than the amount of such advance surtax which it would have been required to pay, it can send to the Income-tax Officer an estimate in lieu of such statement showing the current chargeable amount and the advance surtax payable by it and pay such amount in accordance with the estimate in equal instalments.

Finance Act, 1981

24.8 Sub-section (7) of section 7A provides that where a company which has sent its statement of advance surtax estimates on or before the date on which the last instalment of advance surtax is payable in its case that the amount of advance surtax payable on its current chargeable amount would be less than that shown in its statement, it can, at its option, send to the Income-tax Officer a lower estimate of advance surtax and pay the amount of advance surtax in accordance with such estimate on the specified dates as have not expired or in one lump sum if only the last of such dates has not expired.

Finance Act, 1981

24.9 Sub-section (8) of section 7A provides that where the advance surtax payable on its current chargeable amount is likely to exceed the advance surtax shown as payable by it in its statement or estimate by 20 per cent, such a company will be required to send an estimate of higher advance surtax payable by it on or before the date on which the last instalment of advance surtax is payable by it and pay such amount of advance surtax on the specified dates which have not expired. It has, however, been provided that where the Commissioner of Income-tax in exercise of his powers under the proviso to section 209A(4) or section 212(3A) of the Income-tax Act has permitted any company to furnish the higher estimate of advance income-tax within the extended period of one month, such a company can pay the balance amount of advance surtax on or before such extended date.

Finance Act, 1981

24.10 Sub-section (9) of section 7A provides that a company may send the revised estimate of its advance surtax payable by it on or before the dates specified for payment of advance surtax and adjust the excess or deficiency in respect of any instalment already paid in any subsequent instalments. The statement or estimate under section 7A has to be sent in Form No. 16 or 17 prescribed in this behalf and has to be verified in the manner laid down therein.

Finance Act, 1981

24.11 New section 7B provides for the payment of simple interest by the Central Government at the rate of 12 per cent per annum on the amount by which the aggregate amount of advance surtax paid by the company during the financial year exceeds the amount of surtax determined on regular assessment, from 1st April of the relevant assessment year to the date of the regular assessment. This provision is broadly on the lines of section 214 of the Income-tax Act.

Finance Act, 1981

24.12 New section 7C specified in circumstances in which the company is required to pay interest. Sub-section (1) provides that where the aggregate amount of advance surtax paid by the company during the financial year is less than 831/3 per cent of the amount of assessed surtax, such company will be required to pay simple interest at the rate of 12 per cent per annum on the amount of such shortfall from 1st April of the assessment year to the date of the regular assessment. Sub-section (2) of section 7C provides that where a company has not furnished the statement of advance surtax or the estimate in lieu of the statement of advance surtax or the new company not previously assessed by way of regular assessment has not furnished the estimate of advance surtax, such a company will be liable to pay simple interest at the rate of 12 per cent per annum from 1st April of the assessment year to the date of regular assessment on the amount of assessed surtax.

Finance Act, 1981

24.13 Sub-section (3) of section 7C provides that where a company which is required to furnish a higher estimate of advance surtax under section 7A(8) has not sent such estimate, it will be required to pay interest at the rate of 12 per cent per annum from 1st April of the assessment year to the date of regular assessment on the amount by which the advance surtax paid falls short of the assessed surtax. Sub-section (4) of section 7C provides that in a case where a provisional assessment has been made under section 7, the interest under sub-section (1) or (2) or (3) shall be calculated up to the date on which the surtax provisionally assessed has been paid and thereafter interest shall be calculated at the specified rate on the amount by which the surtax provisionally assessed falls short of the assessed surtax. Sub-section (5) of section 7C empowers the Income-tax Officer to reduce or waive the interest payable by the company under section 7C in such cases and such circumstances as have been specified in rule 13C.

Finance Act, 1981

24.14 Sub-section (6) of section 7C provides for the reduction in the amount of interest in a case where the amount on which interest was payable has been reduced as a result of appeal, revision, rectification or any other order referred to in section 18, read with section 260 or section 262 of the Income-tax Act. Where the amount of interest is so reduced, and excess amount of interest has been paid, such excess will be required to be refunded. For the purposes of this section and section 9A, the expression assessed surtax means the surtax determined on the basis of regular assessment without making any deduction therefrom.

The provisions of this section are broadly on the same lines as section 215 and section 217 of the Income-tax Act.

Finance Act, 1981

24.15 New section 7D provides for payment of interest by a company which has reduced the amount of advance surtax payable in either of the first two instalments, at the rate of 12 per cent per annum for the period during which such payment was deficient on the difference between the amount paid in each instalment and the amount which should have been paid by the company having regard to the aggregate advance surtax actually paid by it during the financial year. The provision of this section broadly corresponds to that of section 216 of the Income-tax Act.

Finance Act, 1981

24.16 New section 9A provides for the penalty payable by a company for making a false estimate or for failure to pay advance surtax. Where a company has furnished a false statement of advance surtax under section 7A(5)(a), such a company shall be liable to pay penalty which shall not be less than 10 per cent, but which will not exceed 1ýÿ times the amount by which the surtax actually paid during the financial year falls short of 831/3 per cent of the assessed surtax or the amount which would have been payable if the company had filed a correct statement of advance surtax, whichever is less. Where a company has, without reasonable cause, failed to furnish the statement of advance surtax in accordance with section 7A(5)(a), it will be liable to a penalty of an amount which will not be less than 10 per cent but which will not exceed 1ýÿ times of 831/3 per cent of the assessed surtax.

Finance Act, 1981

24.17 Where a company has furnished a false estimate of advance surtax under section 7A(5)(b)/7A(6)/7A(7)/7A(9), it will be liable to a penalty which will not be less than 10 per cent but which will not exceed 1ýÿ times the amount by which the surtax actually paid during the financial year falls short ofýÿ

(i) 831/3 per cent of the assessed surtax, or

(ii) the amount of advance surtax payable in accordance with the statement furnished under section 7A(5)(a), whichever is less.

Where a company has furnished a false estimate of advance surtax under section 7A(8), it will be liable to a penalty which will not be less than 10 per cent but which will not exceed 1ýÿ times the amount by which the surtax actually paid during the financial year falls short of 831/3 per cent of the assessed surtax. Where a new company which has not been previously assessed by way of regular assessment, has, without reasonable cause, failed to furnish the estimate of advance surtax under section 7A(5)(b), it will be liable to a penalty of an amount which will not be less than 10 per cent but which will not exceed 1ýÿ times of 831/3 per cent of the assessed surtax. Where a company has without reasonable cause failed to furnish the estimate of advance surtax payable under section 7A(8), it will be liable to a penalty which will not be less than 10 per cent but which will not exceed 1ýÿ times the amount of surtax payable in accordance with its statement of advance surtax under section 7A(5)(a) or the estimate of advance surtax under section 7A(5)(b) or the estimate in lieu of statement under section 7A(6) falls short of 831/3 per cent of the assessed surtax.

Finance Act, 1981

24.18 The Explanation to new section 9A provides that where the Commissioner in exercise of his powers under the proviso to section 209A(4) or section 212(3A) of the Income-tax Act has extended the date for furnishing the estimate of advance tax and such extended date falls beyond the financial year, then for the purpose of sub-section (2)(ii) of section 9A, the amount of advance surtax paid by the taxpayer on or before such extended date will also be regarded as advance surtax paid during the financial year.

Finance Act, 1981

24.19 These provisions will take effect from 1-4-1981 and will apply in relation to the payment of advance surtax or the defaults in payment of advance surtax during the financial year 1981-82.

[Sections 35 to 39 of the Finance Act]

Finance Act, 1981

Amendment of provisions relating to payment of fees in respect of appeals to the Appellate Tribunal – Section 12

25.1 Under section 12(6), a fee of Rs. 125 is payable in respect of an appeal to the Appellate Tribunal. The Finance Act has raised the fee payable in this behalf from Rs. 125 to Rs. 200 with effect from 1st June, 1981. Accordingly, where the assessment proceedings were initiated after 31-3-1971 but before 1-6-1981, the existing fee of Rs. 125 will be payable. Where, however, the assessment proceedings are initiated after 31-5-1981, the enhanced fee of Rs. 200 will become payable. For this purpose, the assessment proceedings will be deemed to have been initiated on the date on which the assessee was served with a notice calling upon him to file the return of chargeable profits for the relevant assessment year or the date on which the return of chargeable profits for the relevant assessment year was furnished by the assessee voluntarily. Thus, where the dispute relates to the assessment, the question whether the existing fee or the enhanced fee will be payable will depend upon the date on which the assessment proceedings are deemed to have been commenced.

Finance Act, 1981

25.2 This amendment is similar to the amendment made in section 253 of the Income-tax Act referred to in paragraph 18.3.

Finance Act, 1981

25.3 This provision takes effect from 1-6-1981.

[Section 40 of the Finance Act]

Finance Act, 1981

Tax concessions to foreign companies engaged in prospecting for, or extraction or production of, mineral oils in India – New section 24AA

26.1 As mentioned in para 11.4, India is seeking participation of foreign companies in the field of oil exploration or production and the Government is at present examining the question of entering into agreements with such companies on a participation basis. In the context of this position, it was considered necessary that the Central Government should have powers to relax or modify the provisions of the Surtax Act. Accordingly, the Finance Act has inserted a new section 24AA with a view to enabling the Central Government to make an exemption, reduction in rate or other modification in respect of surtax in favour of foreign companies with whom the Central Government has entered into agreements for the association or participation of that Government or any person authorised by it in any business of prospecting for, or extraction or production of, mineral oils and natural gas. This power will be available in relation to the chargeable profits earned by such foreign companies from the business of oil exploration or production, whether in any on-shore or off-shore areas or from the business of providing any services or facilities in connection with any business consisting of the prospecting for, or extraction of or production of, mineral oils carried on by that Government or any person notified by it in this behalf or those supplying any ship, aircraft, machinery or plant in connection with such business, whether by way of sale or by hire. The tax concessions under this provision will be granted by a notification in the Official Gazette which will be placed on the Table of both Houses of Parliament.

Finance Act, 1981

26.2 This amendment is similar to the amendment proposed to be made in section 293A of the Income-tax Act referred to in paragraph 11.4.

Finance Act, 1981

26.3 This amendment has taken effect from 1-4-1981.

[Section 42 of the Finance Act]

Finance Act, 1981

Amendment of provision relating to exclusion of dividends, royalties, etc. – First Schedule

27.1 Surtax is payable by every company on its chargeable profits in excess of the statutory deduction. The expression chargeable profits has been defined to mean the total income of an assessee computed under the Income-tax Act for the previous year and adjusted in accordance with the provisions of the First Schedule as reduced by the income-tax payable. Rule 1 of the First Schedule provides for the deduction of the following items :

i. capital gains ;

ii. compensation or other payment referred to in section 28(ii) of the Income-tax Act ;

iii. profits and gains of any business of life insurance ;

iv. income chargeable to income-tax under section 41(2) ;

v. income chargeable under the Income-tax Act under the head Interest on securities paid by the Central Government and declared to be income-tax free or from the securities of the State Government issued income-tax free and the income-tax thereon is payable by the State Government ;

vi. 50 per cent of the amount of donations which qualifies for deduction under section 80G of the Income-tax Act ;

vii. income by way of dividends from an Indian company or company which has made the prescribed arrangements for the declaration and payment of dividends within India ;

viii. income by way of royalties received from Government or a local authority or any Indian concern ;

ix. in the case of a foreign company, its income by way of interest or fees for rendering technical services from Government or a local authority or any Indian concern ;

x. in the case of a banking company

(a) any amount transferred to the reserve fund under section 17(1) of the Banking Companies Act, 1949 or deposited by it with the Reserve Bank of India under section 11(2)(b)(ii), or

(b) transfer to reserves which are not allowed as deduction in computing the total income subject to certain conditions,

whichever is higher ;

xi. the amount of any deduction from income-tax chargeable on the total income allowed under the Finance Act in connection with exports.

Finance Act, 1981

27.2 Under the Income-tax Act, the income by way of dividends is charged to tax under the head ýÿIncome from other sourcesýÿ and is computed under section 56 after making the deduction, firstly, in respect of any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such dividends on behalf of that company and secondly, in respect of any other expenditure, other than capital expenditure, laid out or expended wholly and exclusively for the purpose of making or earning such income, such as interest paid on borrowings utilised in the purchase of shares.

Finance Act, 1981

27.3 Last year, the Finance (No. 2) Act, 1980 inserted a new section 80AA in the Income-tax Act to provide that the deduction in respect of intercorporate dividends would be allowed on the net amount of dividends, that is, after giving the deduction in respect of interest on borrowings, etc., and not on the basis of the gross amount of such dividends as was held by the Supreme Court in the case of Cloth Traders (P.) Ltd. v. Addl. CIT [1979] 118 ITR 243. The new section 80AA was introduced to clarify the underlying intention with retrospective effect from 1st April, 1968, that is, the date of introduction of Chapter VIA in the Income-tax Act. In several cases, the High Courts have held that even for the purposes of computation of the chargeable profits under the Surtax Act, in regard to item (vii), the gross amount of dividends should be excluded from the total income. The legislative intent could have only been to exempt from surtax the amount of dividends which has actually been included in the total income and accordingly the High Court rulings have resulted in giving unintended benefit to companies in respect of dividends received by them from domestic companies.

Finance Act, 1981

27.4 The Finance Act has accordingly inserted a new Explanation in Rule 1 of the First Schedule so as to provide that in computing the chargeable profits, the amount of income or profits and gains referred to in Rule 1 and specified in paragraph 27.1 above which stands included in the total income alone would be deducted from the chargeable profits. In other words, the amount of dividends and royalties computed for the purposes of the Income-tax Act after allowing all deductions (including deductions under sections 80M and 80MM) will only be excluded for the purpose of surtax.

Finance Act, 1981

27.5 This provision has come into force from 1-4-1981 and will, accordingly, apply in relation to assessment year 1981-82 and subsequent years.

[Section 43 of the Finance Act]

7. Amendments to Interest-tax Act

Amendment of provision relating to the payment of fee in connection with appeal to the Appellate Tribunal – Section 16

28.1 Under section 16(6), a fee of Rs. 125 is payable by an assessee in respect of an appeal to the Appellate Tribunal. The Finance Act has raised the fee from Rs. 125 to Rs. 200 with effect from 1-6-1981. Accordingly, where the assessment proceedings were initiated before 1-6-1981, the existing fee of Rs. 125 will be payable. Where, however, the assessment proceedings are initiated after 31-5-1981, the enhanced fee of Rs. 200 will become payable. For this purpose, the assessment proceedings will be deemed to have been initiated on the date on which the assessee was served with a notice calling upon him to file the return of chargeable interest for the relevant assessment year or the date on which the return of chargeable interest for the relevant assessment year was filed by the assessee voluntarily, whichever is earlier. Thus, where the dispute relates to the assessment, the question whether the existing fee or the enhanced fee will be payable will depend upon the date on which the assessment proceedings are deemed to have been initiated.

Finance Act, 1981

28.2 This amendment is similar to the amendment made to section 253 of the Income-tax Act referred to in paragraph 18.5.

Finance Act, 1981

28.3 This provision has taken effect from 1-6-1981.

[Section 44 of the Finance Act]
8. Amendments to Hotel-Receipts Tax Act

Amendment of provision relating to the payment of fee in connection with appeal to the Appellate Tribunal – Section 19

29.1 Under section 19(6), a fee of Rs. 125 is payable by an assessee in respect of an appeal to the Appellate Tribunal. The Finance Act has raised the fee from Rs. 125 to Rs. 200 with effect from 1-6-1981. Accordingly, in a case where the assessment proceedings were initiated before 1-6-1981, the existing fee of Rs. 125 will be payable. Where, however, the assessment proceedings are initiated after 31-5-1981, the enhanced fee of Rs. 200 will be payable. For this purpose, the assessment proceedings will be deemed to have been initiated on the date on which the assessee was served with a notice calling upon him to file the return of chargeable receipts for the relevant assessment year or the date on which the return of chargeable receipts for the relevant assessment year was filed voluntarily by the assessee, whichever is earlier. Thus, where the dispute relates to the assessment, the question whether the existing fee or the enhanced fee will be payable will depend upon the date on which the assessment proceedings are deemed to have been initiated.

Finance Act, 1981

29.2 This amendment is similar to the amendment made in section 253 of the Income-tax Act referred to in paragraph 18.5.

Finance Act, 1981

29.3 This provision has taken effect from 1-6-1981.

[Section 45 of the Finance Act]
9. Amendments to Compulsory Deposit Scheme (Income-tax Payers) Act

Extension of the compulsory deposit scheme in the case of income-tax payers for another two years

30.1 Under the Compulsory Deposit Scheme (Income-tax Payers) Act, individuals, who are citizens of India, Hindu undivided families and trustees of discretionary trusts, are required to make compulsory depo-sits for the assessment years 1975-76 to 1981-82 (both inclusive), if their ýÿcurrent incomeýÿ exceeds Rs. 15,000. In view of the continuing need to raise the level of savings in the economy, it is decided to continue the compulsory deposit scheme in the case of income-tax payers for another two years, i.e., for the assessment years 1982-83 and 1983-84. The rates of deposit will, however, remain unchanged.

Finance Act, 1981

Repayment of compulsory deposit

30.2 Under the existing provisions, compulsory deposit made or recovered from a depositor in any financial year is repayable in five equal instalments commencing from the expiry of 2 years from the end of the financial year in which the deposit was made or recovered. The Income-tax Officer is, however, empowered to permit earlier repayment of the deposit or any instalment thereof together with interest due thereon in the cases of extreme hardship.

Finance Act, 1981

30.3 Under an amendment made in 1977, individuals who are over 70 years of age have been exempted from the requirement of making any compulsory deposit. The Finance Act has liberalised the position by providing that where a person has reached the age of 70 years in a financial year, the balance standing to his credit in the compulsory deposit account will, at his option, be repayable to him on the expiry of such financial year. Where any person has crossed the age of 70 years before 1-4-1981, the amount standing to his credit in the compulsory deposit account will be repayable to him if he so desired, on 1-6-1981.

Finance Act, 1981

30.4 The amendment discussed in paragraph 30.1 has come into force on 1st April, 1981 and the amendment referred to in paragraph 30.3 has taken effect from 1-6-1981.

[Section 53 of the Finance Act]